Biden Administration Tax Proposals

 The incoming administration has floated a number of tax proposals. Any and all proposals are subject to negotiation with Congress. As of this writing, the Democrats control the House, albeit with a smaller majority than in 2018, and the Senate is up for grabs, awaiting the results of the January 5th Georgia runoff elections. 

If the Republicans continue to control the Senate, it is unlikely that any of Mr. Biden’s proposals will be enacted. If the Democrats control the Senate, the fact that they would hold a bare majority (50 seats plus Vice-President-Elect Harris as tie-breaker) makes it unlikely that the proposals will be enacted without significant compromises to secure votes of Democrats who would be vulnerable at the next election. 

Keeping that in mind, here are the proposals, separated into corporate and business, individual, and trusts and estates.

Business and Corporate Taxes

Raise the corporate tax rate from 21% to 28%. Note that this is still lower than the 35% top rate that was in effect before 2018. The corporate tax would continue to be a flat-rate tax, rather than using graduated rates as existed before 2018.

Institute a minimum tax on corporations. The minimum tax would be 15% of financial statement income. It would only apply to corporations with financial statement income of $100 million or more. Since taxable income often reflects tax incentives such as bonus depreciation, book income may be more than taxable income.

Impose a fee on financial firms with assets over $50 billion that are highly-leveraged. Details of this proposal are not currently available, and it appears to be aimed to encourage large financial firms to avoid incurring excessive debt.

Proposed changes to the taxation of foreign investments by U.S. persons include increasing the tax rate on global intangible low-taxed income (GILTI). The rate would increase from 10.5% to 21.0% and expand the base to which the tax applies.

Provide a credit to companies that make investments that will create jobs in the U.S., bring jobs from overseas to the U.S., or increase manufacturing wages. The credit will equal 10% of the amount invested. 

Enact a surtax on services provided to users in the U.S. but performed abroad (for example, technical support). The surtax would also apply to certain goods produced in foreign countries and used in the U.S.

Eliminate the tax deferral that currently applies to like-kind exchanges of real estate.

Limit the use of passive activity losses from real estate to offset passive activity income from non-real estate activities.

Eliminate the deduction for direct-to-consumer advertising by pharmaceutical companies.

Individual Taxes

Raise the top individual income rate back to 39.6%. This applies to incomes over $400,000.

Limit itemized deductions for taxpayers earning more than $400,000.

For taxpayers earning more than $400,000, phasing out the qualified business income deduction (Code Section 199A).

For individuals making more than $1 million, capital gains and dividends will be taxed at ordinary income tax rates.

An increase in the child tax credit to $3,000 per child for children ages 6 to 17 and $3,600 for children under 6. The credit will be fully refundable (i.e., the credit will be treated similarly to withheld tax, so the excess of the credit over the amount of income tax will be refunded to taxpayer). 

A tax credit to ensure that no family buying insurance through the Affordable Care Act marketplace spends more than 8.5% of their income on health insurance.

Refundable child care tax credit for children under 13 years old. The credit is limited to 50% of child care costs. The maximum would be $8,000 for one child and $16,000 for two or more, and would phase out for families with income between $125,000 and $400,000. 

Tax credits that help working families pay for the cost of caring for an aging loved one, modeled off of legislation supported by AARP. Biden will also increase the generosity of tax benefits for older Americans who choose to buy long-term care insurance. 

Refundable tax credits up to $15,000 for first-time home purchasers. The credit may be claimed in advance of filing the tax return to make the funds at time of purchase.

Replacing the deduction for contributions to retirement plans with a dollar-for-dollar tax credit for contributions to retirement plans. 

Expanding the credit for plug-in electric vehicles.

Estates and Trusts

Details are not currently available for estate and gift tax proposals, but the following possible changes have been mentioned.

The unified credit for estate and gift taxes for 2020 is $11.58 million, and there have been mentions of reducing the unified credit to $3.5 million (adjusted for inflation). 

Possible increase in the top estate tax rate from 40% to 45%. 

Possible recognition of gain on appreciated assets at death. Details are not currently available, and there is speculation that either assets will be deemed sold at fair market value at death, or that the decedent’s basis will carry over the heirs so they will recognize gain when disposing of the assets. 

 If you would like additional information please contact your Gettry Marcus Advisor.

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