As President-elect Biden's tax plan looms on the horizon, significant changes await individuals, businesses, and estates. The outcome of these proposed tax updates rests on the results of the two Georgia senate races scheduled for January 5, 2021. Should Democrats secure both seats, the likelihood of these proposals becoming law increases substantially. This article delves into the implications of Biden's new tax plan for both taxpayers and the accountants tasked with navigating these potential changes.
Understanding Biden’s Tax Plan:
President-elect Biden's tax plan encompasses a spectrum of proposals that could reshape entity choices, particularly affecting businesses. Key components include:
Choice-of-Entity:
Increase in corporate income tax rate to 28%.
Introduction of a minimum tax on corporations with book profits exceeding $100 million.
Imposition of a 12.4% Social Security payroll tax on earnings above $400,000, creating a notable gap between wage limits.
Phase-out of the section 199A benefit for taxpayers with incomes surpassing $400,000.
Repeal of Tax Cuts and Jobs Act provisions for high-income taxpayers.
Reversion of the top individual tax rate to the pre-TCJA level of 39.6%.
Taxation of long-term capital gains and ordinary dividends at a 39.6% rate on income exceeding $1,000,000.
The prospect of increased payroll taxes prompts the question of how many businesses may consider converting to S corporation status to mitigate the impact.
Estate and Gift Tax:
Reduction of the current exemption from $11.58 million to the 2009 level of $3.5 million.
Uncertainty regarding whether the lower exemption will be applied retroactively to the beginning of 2021 or after the date of enactment.
Consideration of the implications for estates in states with estate and/or inheritance taxes.
Investments:
Elimination of the benefit of deferring gain recognition on the exchange of real estate under section 1031 for taxpayers with incomes exceeding $400,000.
Removal of the step-up in basis on capital gains, necessitating careful financial and tax planning.
Biden's plan suggests modifications, not elimination, of the Qualified Opportunity Zones program, impacting clients who self-certify their funds.
Itemized Deductions:
Cap on the tax benefit of claiming itemized deductions at a 28% rate for taxpayers with incomes over $400,000.
Restoration of the Pease limitation on those with incomes exceeding $400,000, phasing out itemized deductions at a 3% rate.
The potential impact on high-income taxpayers emphasizes the importance of strategies such as the Qualified Charitable Distribution provision for those over age 70 ½.
401(K) Plans:
Proposed elimination of the deduction, replaced with a credit, potentially reducing benefits for higher-income taxpayers.
Uncertainty regarding the applicability and retroactivity of such changes to defined contribution plans.
Tax Credits:
Introduction of a $15,000 First Time Home Buyer Credit.
Implementation of a refundable Renter's Credit, capping rental costs at 30% of monthly income.
Expansion of the Child and Dependent Care Tax Credit from $3,000 to $8,000 in qualified expenses.
The potential reinstatement of the First Time Home Buyer Credit and the introduction of new credits underscore the dynamic nature of Biden's tax plan.
While the fate of Biden's tax plan hinges on political developments, the proposed changes necessitate a proactive approach from both taxpayers and accountants. The intricacies involved in entity choices, estate planning, and investment strategies demand careful consideration. As accountants navigate these potential shifts, keeping clients informed during the busy season becomes paramount. The evolving landscape reinforces the need for collaboration between taxpayers and their financial advisors to devise effective strategies that align with the proposed tax changes.
Disclaimer: The content provided in this article is for informational purposes only and does not constitute tax advice. Readers are encouraged to consult with a tax advisor for advice tailored to their specific situations.