Now that the results of the presidential election are in, and former Vice President Joe Biden is named President-elect Biden, it is important to remember the changes to personal income tax policy that Mr Biden announced during his campaign that he would propose if elected. In considering three of these changes, note that the likelihood of these proposed changes going into effect depends in large part on the results of the January 2021 runoff elections in the two Georgia Senate races. If the Republican candidate wins at least one of these two seats, the Republican party will retain control of the U.S. Senate and the likelihood of these changes going into effect in 2021 will decrease significantly. The ongoing impact of the COVID-19 pandemic on the US economy and the need for additional fiscal incentives could also affect the timing and nature of tax law changes.
Amendment No. 1 – Increase in income tax rates on ordinary income
During his campaign, President-elect Biden announced plans to increase income tax rates for the “rich” by raising marginal tax rates to 39.6% for married taxpayers filing joint income tax returns and whose taxable income is over $ 400,000. Under applicable tax laws, the taxable income of married taxpayers over $ 400,000 is taxed at rates of 32%, 35%, or 37%. See Table 1 at the end of this article for a table listing the 2020 income tax rates and the possible 2021 income tax rates when this proposed increase in marginal income tax rates goes into effect in 2021.[1]
Amendment # 2 – Changes to Income Tax Rate for Qualifying Dividends and Capital Gains
Another policy change announced by President-elect Biden is the removal of the 20% tax rate cap on qualifying dividends and capital gains for taxpayers with taxable income greater than $ 1,000,000. Under current law, qualified dividends and long-term capital gains are taxed at rates of 0%, 15% or 20% depending on the taxpayer’s taxable income. For 2020, capital gains from married taxpayers filing joint tax returns and whose taxable income exceeds $ 496,600 will be taxed at 20%. Both types of income (qualified dividends and capital gains) are subject to an additional taxation of 3.8% (Net Investment Income Tax or NIIT). Mr. Biden has announced no plans to repeal or amend the NIIT, which was originally enacted to cover the cost of healthcare under the Affordable Care Act.
In addition, Mr Biden has proposed a limit on individual deductions for taxpayers whose taxable income is taxed at 28% and above. As noted in Table 1, if this change were in effect in 2020, it would apply to married taxpayers filing joint tax returns with taxable income greater than $ 326,600.
Amendment # 3: Increase in income subject to social security taxes
President-elect Biden has announced his intention to propose a change in the amount of earned income that is subject to social security tax so that taxpayers’ earnings over $ 400,000 are subject to social security tax. Under current law, earned income up to $ 137,700 is subject to social security tax[2]. For the self-employed, the social security tax rate is 12.4% with a deduction for half of the social security tax paid. For employees, employers pay 6.2% and employees 6.2%. Social security taxes are payable by each taxpayer (and their employer) on an individual basis, regardless of the taxpayer’s tax return status. Additionally, income earned is subject to unlimited Medicare tax of 1.45%. Mr. Biden has announced no plans to change the current Medicare tax.
To sum up, individuals, especially the “rich”, should closely monitor the political intrigues that will ensue over the next few months to see if their personal income tax plans need to be changed for 2021 and the years ahead.
If you have any questions about how the proposed tax policy changes will affect your tax planning when they are passed in Congress, Dickinson Wright attorneys are here to help. For more information, please contact Ralph Z. Levy Jr., Esq., At the firm’s Nashville, TN office at 615-620-1733, or another Dickinson Wright PLLC attorney who is part of the firm’s Tax Practice Group is.
| Table 1 – Possible tax rate changes | ||||||||
| Tax rates 2020 (joint married taxpayers) | Possible tax rates for 2021 (Biden Plan) | |||||||
| $ 0- $ 19,750 | 10% | 0 | $ 0- $ 19,750 | 10% | 0 | |||
| 19,751-80,250 | 12% | $ 1,975.00 | 19,751-80,250 | 12% | $ 1,975.00 | |||
| 80.251-171.050 | 22% | $ 9,235.00 | 80.251-171.050 | 22% | $ 9,235.00 | |||
| 171,051-326,600 | 24% | $ 29,211.00 | 171,051-326,600 | 24% | $ 29,211.00 | |||
| 326,601-414,700 | 32% | $ 66,543.00 | 326,601-400,000 | 32% | $ 66,543.00 | |||
| 414.701 – 622.050 | 35% | $ 94,735.00 | over $ 400,000 | 39.6% | $ 90,031.00 | |||
| over $ 622,050 | 37% | $ 167,307.50 | ||||||
[1] The tax rates and brackets listed in Table 1 will apply from 2020 to married taxpayers who file joint income tax returns. The seven income tax brackets listed in Table 1 do not reflect the increase in the tax brackets that will take effect in 2021 due to annual inflation adjustments. For example, married taxpayers who file joint income tax returns and have taxable income greater than $ 628,300 in 2021 will be taxed at the highest tax rate of 37%. This is an increase of $ 6,250 over the $ 622,050 reported in Table 1.
[2] Income earned up to US $ 142,800 in 2021 will be subject to Social Security tax based on an annual inflation adjustment.