President Biden has previously expressed his intent to modify numerous current and past tax policies while he was on the campaign trail. Since the Democratic party now has narrow control over both the House and Senate, the possibility for tax change is much more likely. Many professionals believe that President Biden, with the help of Congress, will introduce future legislation that contains significant tax policy and position changes.
In fact, some of these proposed changes have already been introduced. A $1.9 trillion COVID-19 relief package has been introduced to the House, and they expect to vote on the legislation as early as Friday. The relief bill is designed to further address the growing needs resulting from the global pandemic. The current proposal includes the following items that would have an immediate impact:
- Additional economic impact payments of $1,400 that would bring the most recent stimulus payment to $2,000 per person
- Expansion of the Child Tax Credit to $3,000 per child and a clause to make this credit entirely refundable
- Increase of the Earned Income Tax Credit to 3x the current level and extend eligibility for workers without children
- Extension of the temporary moratorium against evictions and foreclosures through September
- Extension of enhanced unemployment benefits that are set to expire at the end of March
In addition to the current relief proposal, there is speculation that the Biden administration will seek to make adjustments to the 2017 Tax Cuts and Jobs Act (TCJA) which modified numerous tax laws and introduced new business credits and deductions. TCJA has been criticized by both Republicans and Democrats and much of Biden’s policy positions before the election was centered around the reversal or elimination of various TCJA provisions. If Biden’s proposals gain momentum, it is possible that there will be a repeal of TCJA sections that benefit high-income filers, generally resulting in increased taxes for individuals earning over $400,000.
President Biden has also expressed support for an increase to a 28% corporate tax rate and a 15% minimum tax on book income of entities that report net income of more than $100 million (but owe no U.S. income tax). Additionally, Biden has proposed raising the tax rate on ordinary income, capital gains, and dividends; phasing out the deduction for pass-through business income for certain taxpayers; and increasing the impact of the estate tax. An outline of some of the changes proposed are detailed below:
- Individual taxpayers making over $400,000 may see an increase in their top income rate from 37% to 39.6%
- Itemized deduction caps at 28% and restoration of pacing limitations
- Modification or elimination of the SALT cap from TCJA which capped state and local tax deductions to $10,000
- Elimination of preferential qualified dividend and long-term capital gain rates for taxpayers above $1 million in income
- Elimination of preferential treatment for real estate entities granted under TCJA, including the application of 1031 exchanges for taxpayers above certain income thresholds
- Increase of corporate tax rate from 21 to 28% or back to pre-TCJA rates of 35%
- Expansion of Social Security tax to those making over $400,000
- Decrease of the gift, estate, and generation-skipping transfer tax from $11.7 million down to prior rates (expected to be around $3.5 million but no clear amount has been stated)
- Elimination of a basis step-up at death for appreciated assets, though there is uncertainty if there would be a complete elimination or a threshold limitation
- Restrictions on grantor retained annuity trusts (GRATs) and generation Skipping Tax (GST) trusts
It is important to note that no detailed tax policy beyond the COVID-19 relief package has been formally announced. More information on President Biden’s proposals may be available when his first budget provisions are sent to Congress.
While there is still much uncertainty regarding future tax legislation, we encourage you to reach out to your HBK Tax Advisor to discuss how these potential changes may impact your business or personal taxes.