By David R. Foster, JD, AEP, CLU, ChFC, CAP, FLMI
The 2017 Tax Act contained sweeping changes to the federal tax code for individuals, families, estates, and businesses. How long the Act will remain the law of the land is largely dependent on the outcome of the upcoming elections. The current administration has stated their intent to retain and/or enhance the Act and make any provisions that are temporary more permanent. The challenger’s campaign has laid out a detailed tax plan that repeals many of the provisions in the 2017 Act while adding a few new tax changes of their own. Should the current administration prevail we can expect to resume planning based on current laws and adjust should any minor tweaks come down the road. Should a new administration prevail, it may be appropriate to prepare for substantial changes and plan accordingly.
While many provisions included in the 2017 Tax Act are set to expire at the end of 2025 unless legislative action is taken, the election of a new Democratic administration may accelerate the demise of many of the provisions previously enacted and bring with it new changes of their own. This may be a good time to explore the tax-related agenda proposed by the Joe Biden campaign leading up to the election. There is no guarantee if, or when, such proposals may become law. However, gaining an understanding of potential tax law changes may help prepare for opportunities and/or challenges.
The potential tax law changes listed below are based off official statements made by the Biden campaign leading up to the 2020 presidential election. This is not an all-encompassing list of potential changes that may be considered by a new administration. However, it does represent changes the campaign has consistently included in their platform.
Personal Income Taxes
- Raise the top individual income rate from 37% to 39.6%.
- Taxpayers with more than $1 million of taxable income would pay ordinary income tax rates on capital gains and qualified dividends (instead of the lower capital gains tax rate).
- Impose social security taxes on taxable income above $400,000. Currently this only applies to income above the social security wage base (set at $142,800 in 2021).
- Increase the child tax credit from $2,000 to $3,000 for children age 6 to 17 and $3,600 for children under age 6.
- New $5,000 tax credit for family caregivers (those meeting cognitive or physical needs of a family member).
- New tax incentives for the purchase of long-term care insurance (details not specified)
- Changes related to contributions to qualified retirement plans to “equalize” the tax benefits for all levels of income (details not specified).
- Repeal the $10,000 cap on SALT deductions (deduction for state and local taxes). However, another proposal would limit the tax benefits of itemized deductions to 28% of value for those making over $400,000. For example, a taxpayer making over $400,000 who has $50,000 of itemized deductions would be limited to using $14,000 of those deductions.
Estate and Gift Taxes / Taxes at Death
- Decrease the applicable exclusion amount for estate and gift taxes. Current exclusion in 2020 is $11.58 million ($23.16 million for a married couple). No official figure has been proposed, but exclusion likely to be reduced to $3.5-$5 million ($7-$10 million for a married couple).
- Repeal of the step-up in basis rules at death. Basis of deceased owner would carryover to heirs. Uncertain if death would trigger the tax, or tax would not be triggered until asset was sold by heirs. Also, not certain if appreciation prior to repeal of step-up basis rules would be grandfathered in.
Business and Business Owner Taxes
- Raise the corporate tax rate from 21% to 28%
- Phase out of the 20% qualified business income deduction for taxpayers with taxable income above $400,000.
- Revise the tax-free nature of 1031 exchanges (exchanges of commercial real estate) such that it only applies to those with taxable income under $400,000. Has not been promoted heavily by the Biden campaign.
- Impose a 15% corporate minimum tax on book income (applicable only to companies with $100 million or more of net income).
It is important to understand that the potential changing tax laws discussed above are only proposals that could be implemented if there is a new administration. There are many hurdles that would need to be overcome prior to any of them becoming law. Political forces and economic forces would likely have an impact on any tax legislation considered. In addition, the effective date of any change would be unknown. Some of the laws could be effective only after the date of enactment while others could be grandfathered back to the first day of the tax year. And finally, don’t let the tax tail wage the dog – taxation is not the only factor to consider when attempting to achieve your financial, business or estate planning goals.
If you wish to discuss any changes to your plan, please contact your Symphonic Financial Advisor. Before making any investment decisions, please consult your tax advisor.