Former Vice President Joseph R. Biden Jr. has won the 2020 Presidential Election and is now the President-elect—and with any change in Administration comes the possibility of tax law amendments. Below is a brief outline of the individual tax provisions of President-elect Biden’s Tax Plan, along with tax planning opportunities you should be considering with your financial advisors, estate planning attorneys, and your engagement team at Wolf.
It’s important to note that while the proposed Biden tax plan calls for a significant tax overhaul, the ability of his Administration to institute its plan will largely be contingent on the Democrats’ ability to take control of the Senate—an outcome that’s still up in the air. A Democratic sweep in Georgia’s two runoff elections on January 5, 2021, would result in a 50-50 tie in the Senate, effectively giving the Democrats control as any tie-breaking vote would go to Vice President-Elect Harris. Any result short of this would make sweeping tax reform in the next two years a near impossibility. Furthermore, assuming the Democrats take control of the Senate, the timing of the proposed changes is still unknown, with some speculating that any tax law changes would not be pushed through until 2022 given other more pressing issues the new Administration faces.
Increased Income Tax Rates
Under the Tax Cuts and Jobs Act of 2017 (TCJA) enacted by President Trump, the highest individual income tax rate was reduced from 39.6% to 37%. President-elect Biden is proposing restoring the highest individual income tax rate to 39.6%.
Additionally, taxpayers with income in excess of $1 million would see long-term capital gains and qualified dividends taxed at the ordinary tax rate of 39.6% instead of their current preferential rate of 20%.
Planning Considerations
One’s appetite for these considerations will be dependent on how bullish you are on the Democrats’ ability to win both Georgia runoffs.
- Consider accelerating capital gains in 2020
- Consider a Roth conversion in 2020, creating taxable income in 2020 at the lower ordinary income tax rates; any future appreciation and distributions from the Roth would be tax-free
- Consider buying back stock that was sold at a loss in late December 2020 (within 30 days) to create a wash sale and shift the loss into 2021
Itemized Deductions
President-elect Biden would make changes to curb the benefit of itemized deductions, including:
- The tax benefit for itemized deductions would be limited to 28%
- Currently, itemized deductions are a direct offset to ordinary income first, followed by an offset to items of income with preferential rates (long-term capital gains and qualified dividends)
- The allowable itemized deductions would be reduced for those filers with income greater than $400,000, taking away 3 cents in deductions on every dollar of income over $400,000
The impact of these changes would be somewhat offset by a counter-provision that would remove the current $10,000 limit on State and Local Taxes (SALT).
Planning Considerations
One should consider:
- Accelerating deductions in 2020, particularly charitable contributions
- This consideration is often advantageous regardless of potential tax changes, and if the above changes were to come to fruition, the benefit would only be amplified
- Delaying payment of state and local taxes until 2021, when the cap on these taxes may be lifted
Estate and Generation-Skipping Transfer Tax
Under the TCJA, the lifetime gift and generation-skipping transfer (GST) tax exemption was doubled from $5 million to $10 million and is adjusted for inflation on an annual basis, with the lifetime exemption available for 2020 set at a level of $11.58 million. This exemption is set to sunset after 2025. While President-elect Biden’s tax plan doesn’t specifically state his plans for this provision, there’s wide speculation in our professional community that this exemption could revert to pre-TCJA levels.
President-elect Biden has proposed eliminating the stepped-up basis rule that allows taxpayers to pass capital gains to their heirs tax-free after death. Instead of heirs receiving inherited assets with a basis equal to the fair-market value at the decedent’s death, their basis in the inherited assets will equal the basis in the hands of the decedent before they died.
Planning Considerations
Those who expect to have a taxable estate should consider utilizing their remaining lifetime exemption in 2020. Irrespective of any tax law changes, those individuals with a taxable estate should be considering this option, as the lifetime exemption is set to be cut in half at the end of 2025. Please act soon, as your estate planning attorneys are likely to be very busy for the remainder of the year.
We ask that you please reach out to your engagement team at Wolf if you’re interested in pursuing any of the above planning considerations.
Other Potential Tax Law Changes
- Payroll Taxes: President-elect Biden would increase payroll taxes for employers and employees on income over $400,000
- Depreciation: He would look to reverse many of the provisions that were enacted in the TCJA, which would largely allow companies to expense 100% of the cost of many capital improvements in year one
- Carried Interest: He would eliminate the carried interest provisions; however, if qualified dividends and long-term gains are taxed at ordinary rates, there would be less incentive to make this change
- Qualified Business Income Deduction: This deduction would be phased out for individuals earning more than $400,000; this provision would also be eliminated for real estate investors
- Opportunity Zone Funds: He would impose more stringent rules to ensure the program is accomplishing the desired benefit
- “Green” Initiatives: He would restore and enhance several of the clean energy and energy efficiency credits that have either expired or are being phased out of the current tax law; he would also end fossil fuel subsidies including deductions for drilling wells and depletion of oil and gas deposits
- Dependent Care Credit: He would allow for a credit of up to $8,000 for one child and $16,000 for two children or more for certain families, depending on level of income
- First Time Home Buyer Credit: He would provide for a $15,000 refundable, advanceable credit for first-time home buyers
- Child Tax Credit: He would make the Child Tax Credit fully refundable, and expand the credit to $3,000 per child (ages 6 to 17) and $3,600 per child for children under 6; this would be applicable for 2021 and then as long as economic conditions require
While the chances for a sweeping tax overhaul may seem remote, it’s possible some of the above changes will be enacted as part of a future stimulus package. COVID-19 relief has cost the government more than $2 trillion. In a year of uncertainty, we can state with high confidence that the tax law as it currently stands is as favorable to the taxpayer as it will be for some time. But with a new Administration entering the White House, it seems as though the tax laws are ripe for change.
