Biden’s tax plan: Implications for taxpayers + accountants

If President-elect Biden’s tax plan is implemented, it will bring massive change to individuals, businesses and estates. The likelihood of these tax plan updates passing through congress hinges on the two Georgia senate races to be held on January 5, 2021. Should the Democrats win both seats, it is probable that at least some, if not most, of these proposals will become law. This article explores what Biden’s new tax plan proposals would mean to taxpayers and their accountants.

What is Biden’s Tax Plan?

Choice-of-Entity: Various proposals from Biden's tax plan that would affect entity choice include increasing the corporate income tax rate to 28%; creating a minimum tax on corporations with book profits of $100 million dollars; imposing the 12.4 % Social Security payroll tax on earnings above $400,000 (this provision would create an interesting gap between the 2021 wage/earnings limit where the tax is imposed up to $142,800 and above $400,000); phasing out the section 199A benefit for taxpayers with incomes over $400,000; repealing the Tax Cuts and Jobs Act provisions for high-income taxpayers; reverting the top individual tax rate back to the pre-TCJA of 39.6%, and taxing the long-term capital gains and ordinary dividends at the ordinary rate of 39.6% on income above $1,000,000.

How many businesses will convert to S corporation status just to avoid the increased payroll tax?

Estate and Gift Tax: The current exemption of $11.58 million would decrease to the 2009 level of $3.5 million. Will the lower exemption be applied retroactively to the beginning of 2021 or after the date of enactment? Accountants need to keep in mind that there are several states that impose an estate and/or inheritance tax. With the increases in residential real estate values and the equity market, many of our clients will now find their estates subject to a tax with this lower exemption. Accountants will have to look closely to see which of their clients will need estate tax planning.

Investments: The benefit of deferring the recognition of gain on the exchange of real estate under section 1031 would be eliminated for those taxpayers with incomes over $400,000. The step-up in basis on capital gains would be eliminated. These are major changes and, when considered with taxing long-term capital gains and dividends at the ordinary income rate of 39.6% on those with incomes over $1,000,000, would mean many of our clients are simply going to need financial/tax planning.

With respect to Qualified Opportunity Zones, it appears that Biden's tax plan would not eliminate but rather modify the program. Changes could be expected in the type of real estate investments that could qualify. This would impact our clients who self-certify their own fund. Would the benefit of not paying tax on gains when the fund is held for at least ten years be reduced or eliminated for high income taxpayers?

Itemized Deductions: For taxpayers with incomes over $400,000, the tax benefit of claiming itemized deductions would be capped at a 28% rate, even though the client is in a higher tax bracket. In addition, the Pease limitation would be restored on those with incomes over $400,000. This limitation phases out itemized deductions at a 3% rate.

This makes the Qualified Charitable Distribution provision for those over age 70 ½ even more important. Of course, the law could be written in such a way as to recapture the tax benefit for high-income taxpayers.

401(K) plans: The deduction would be eliminated and replaced with a credit. This could end up applying to all defined contribution plans. What this most certainly means is that higher-income taxpayers are going to receive a benefit that is lower than their tax bracket. For example, for a credit of 26% and a tax bracket of 37%, will this translate into fewer dollars going into retirement plans? Will such a change be retroactive to the beginning of 2021?

First Time Home Buyer Credit: This credit which was created during the great recession, may come back. Under Biden's tax plan, the credit would be $15,000.

Renter’s credit:  This would be a refundable credit that would help the renter cap rental costs at 30% of monthly income.

Child and Dependent Care Tax Credit: This would be expanded from $3,000 to $8,000 in qualified expenses.

At this point, who knows whether and when Biden's new tax plan will become law. What is clear is that, during the busy season, we need to give our clients a “heads up” as to what will come.

The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.