With uncertainty around the November elections, investors are asking about policy changes that may be introduced under a new administration and a Democratic-controlled Congress.
A look at tax proposals being offered by Democratic candidate Joe Biden could be a place to start.
The tax plan is a collection of various high-level proposals, subject to modification and clarification in the event these proposals became part of formal legislation in the future.
Key points of the proposed Joe Biden tax plan*
Corporations
- Increase in the corporate tax rate from 21% to 28%
- Other tax increases include a minimum 15% tax rate on domestic and foreign income, an increase on the global intangible low-tax income (GILTI) tax rate to 21% (from current 10.5%), and a 10% surtax on income from goods and services sold from a foreign subsidiary
- Introduce a “Made in America” tax credit
Small businesses
- Eliminate the 20% deduction for qualified business income (QBI) for those reporting more than $400,000 in income
Ordinary income
- Restore the 39.6% tax rate for higher-income taxpayers (roughly defined as those earning more than $400,000 ). It is not clear whether that income threshold would apply to individuals, married couples, or both.
Investment income
- Tax long-term capital gains and qualified dividends as ordinary income (39.6% under the Biden plan) for those reporting more than $1 million in income
- Elimination of 1031 exchanges for those reporting more than $400,000 in income
Tax deductions
- The value of itemized deductions would be capped at the 28% tax bracket
- Phaseouts of deductions for those with more than $400,000 in income would be restored
- The limit restricting deduction of state and local taxes (SALT) to $10,000 total would be repealed
Tax credits
- Increases in the Child Tax Credit (CTC)and Child and Dependent Care Credit
- New first-time homebuyer tax credit (up to $15,000) and caregiver tax credit (up to $5,000)
Payroll taxes
- Subject earnings above $400,000 to the Social Security payroll tax of 12.4%
Taxation of assets at death
- Limit stepped-up cost basis on certain inherited assets at death. Specific details are not clear
Other potential, tax-related proposals that could emerge
Based on research of tax-related policies proposed by the previous administration when Joe Biden was vice president, here are additional provisions that may be introduced under a Biden administration.†
- Reduce the lifetime estate and gift tax exclusions. The last budget proposed by the Obama administration called for restoring 2009 levels of $3.5 million for estates and $1 million for gifts
- Modify grantor trust rules, apply a minimum term of 10 years for grantor retained annuity trusts (GRATs), require a taxable gift when funding a GRAT
- Disallow the use of dynasty trusts
- Enact a “fair share tax” on those reporting more than $1 million in income. The tax would ensure those taxpayers would not pay income tax less than 30% of their adjusted gross income (AGI), less a credit for charitable contributions
- Implement a financial services institution fee of 0.07% applied on certain liabilities of banks and non-bank financial institutions such as insurance companies and asset managers with more than $50 billion in assets
Revisit tax planning
Despite uncertainty around tax rates and what tax changes may be introduced, it may be an appropriate time to meet with a financial advisor or tax professional and review current tax plans. Investors may consider making changes to their plans or take advantage of certain strategies before year-end.
*Sources: Biden-Harris campaign, A tale of two tax policies. Tax Foundation, Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Proposals. Committee for a Responsible Federal Budget, Understanding Joe Biden’s 2020 Tax Plan.
†Source: Treasury Department, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, February 2016.
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