Somehow lost in all of the news coverage of the COVID-19 pandemic and social unrest, Joe Biden, the former Vice President and current Democratic nominee for President, has proposed a number of individual, payroll, and corporate tax increases to fund new or expanded government programs. The proposal comes as Biden has partnered with Vermont senator Bernie Sanders to further attract progressives to his campaign and allure voters in November. These proposals will have a material impact on higher-income taxpayers.
Individual Taxes Summary
In general, higher-income taxpayers would face significantly increased income and payroll taxes. The changes would repeal the income tax rate reductions from the Tax Cuts and Jobs Act of 2017 (TCJA) for those taxpayers with incomes above $400,000. The Pease limitation would be revived and the value of itemized deductions for taxpayers in tax brackets above 28% would be limited. Capital gains and dividends would be taxed at the same rate as ordinary income for taxpayers with taxable incomes above $1 million and unrealized capital gains would not be eliminated by “stepping-up” the cost basis of those assets to Fair Market Value (FMV) at death. Earnings over $400,000 would also be subject to the Social Security payroll tax.
- Reverts the top individual income tax rate for taxable incomes over $400,000 from 37% to 39.6%. Estimates below:
|Current Law||Biden Proposal|
|Brackets||Tax Rate||Brackets||Tax Rate|
|Over $529,663||37%||Over $418,400||39.6%|
|Married Filing Joint||$0-$20,136||10%||$0-$20,136||10%|
|Over $635,585||37%||Over $470,000||39.6%|
- Taxes long-term capital gains (held for over one year) on investment assets and qualified dividends at the ordinary income tax rate of 39.6% for taxpayers with taxable income over $1 million. The current long-term capital gains rates are:
|Filing Status||Capital Gains Rate|
|Single||Taxable Income < $40,000||$40,0001-$441,450||Over $441,450|
|Married Filing Joint||Taxable Income < $80,000||$80,001-$496,600||Over $496,600|
- Caps the benefit of itemized deductions to 28% of value, which means that taxpayers in tax brackets above 28% will face limited deduction values.
- Restores the Pease limitation on itemized deductions for taxpayers with taxable incomes over $400,000. This limitation, named after former Democratic Congressman Donald Pease from Ohio, would cap the amount of itemized deductions available to be claimed based upon Adjusted Gross Income (AGI).
- Phases out the qualified business income deduction (Section 199A) for taxpayers with taxable incomes over $400,000.
- Eliminates the basis “step-up” rule so that heirs will be liable for any capital gains on assets they inherit.
- Expands the Earned Income Tax Credit (EITC) for childless workers over age 65. The EITC is a refundable tax credit for lower income taxpayers.
- Provides renewable energy related tax credits to taxpayers, such as the electric vehicle credit, the solar investment credit, and the residential energy efficiency credit.
- Expands the child and dependent care credit to $8,000 per child (up to $16,000), makes it refundable, and payable in advance.
- Forgives certain student loan debt and excludes it from taxable income.
- Eliminates the Section 1031 “like-kind” exchange for real estate investors with taxable incomes over $400,000.
- Imposes a 12.4% Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on earned income over $400,000, split evenly between employees and employers (unless you are self-employed where you pay the entire amount). This would create a “donut hole” compared to the current Social Security payroll tax, where wages above $137,700 (the current wage cap) are not taxed.
- Increases Social Security survivor benefits, increases the “Special Minimum Benefit” (the floor on Social Security benefits) and moves future cost of living adjustments from the CPI-W (wage and clerical workers) to the CPI-E (elderly), which usually grows at a faster rate.
- Replaces the deduction for contributions to IRAs and other defined contribution plans with a refundable tax credit of 26%.
- Increases tax benefits for older taxpayers who purchase long-term care insurance using retirement savings.
- Estate tax exemption assumed to revert to pre-TCJA levels.
- Increases the top corporate income tax rate to 28% from 21%.
- Imposes a 15% minimum tax on corporations with book income over $100 million.
- Doubles the minimum tax on profits earned by foreign subsidiaries of U.S. firms from 10.5% to 21%.
- Establishes a Manufacturing Communities Tax Credit to encourage investments in communities that have suffered a major job loss event (provides funding for projects that boost local economic growth).
- Offers tax credits to small business for adopting workplace retirement savings plans.
- Expands several renewable energy credits and deductions and ends subsidies for fossil fuels.
- Enhances tax incentives for carbon capture and storage.
- Eliminates the deduction for advertising expenses for pharmaceutical companies (I will miss the long list of absurd side effects). Just another fun fact, only the U.S. and New Zealand even allow pharmaceutical companies to market prescription drugs directly to consumers.
- Based upon both conventional and dynamic revenue estimates, Biden’s tax proposals would raise just under $4 trillion between 2021 and 2030, being split roughly evenly from high-income households and corporations. However, this amount is not expected to be enough to materially slow down the ever-increasing Federal debt caused by high government spending and transfer programs.
- In 2021, these tax proposals would increase taxes on all income groups, but higher-income households would see substantially larger increases, both in dollar amounts and as a share of their incomes. Taxes on households in the top 1 percent of the income distribution (those with income more than $837,000) would rise by an average of about $299,000, or 17.0 percent of after-tax income. By contrast, taxpayers in the middle (those with income between about $52,000 and $93,000) would experience an average tax increase of just $260, or 0.4 percent of after-tax income. Lower earning taxpayers (those with income less than $26,000) would see an average tax increase of only $30, or 0.2 percent of after-tax income (data on the distribution of tax changes comes from the Tax Policy Center of the Urban Institute and Brookings Institution).
- Although no one can truly define what paying your “fair share” of taxes is, economists at the University of Pennsylvania calculate that after these tax law changes, the top 20% of individual taxpayers will pay 75.6% of all Federal individual income tax. Hopefully, that is progressive enough (the tax code, that is).
Election day is still months away, and it is impossible to know the tax policy agenda in 2021 and beyond. Further, as the nation continues to grapple with the economic uncertainty stemming from the COVID-19 pandemic, future tax proposals may be influenced by the status of the economy at that time.
Despite this uncertainty, significant tax law changes are a real possibility in the coming years. It is never too early to start evaluating the proposals being put forward, modeling potential outcomes, and planning appropriate action.
As always, please do not hesitate to reach out to your Wealthspire advisor with any questions or concerns.