Tax Reform Under Biden: On Hold for Now?
During his presidential campaign, Joe Biden outlined his tax policy proposals, which included rolling back some key provisions of the recent Tax Cuts and Jobs Act (TCJA). Even though tax reform may be on hold for 2020 or 2021, below we take a look at some of the key proposals of the “Biden Tax Plan” compared to current law.
|Current||Biden Tax Plan|
|Top Individual Federal Income Tax Rate||Currently 37%||Restore the top rate to the pre-TCJA level of 39.6% for taxable incomes above $400,000|
|Social Security Payroll Tax||Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) tax (6.2%) is not collected on earnings above $137,700 (2020 earnings limit)||Collect additional OASDI tax on earnings above $400,000; this would effectively create a “donut hole” for the OASDI tax|
|Long-Term Capital Gains & Qualified Dividends||Top federal tax rate of 20%, plus 3.8% Net Investment Income Tax (NIIT)||Tax at the top (proposed) ordinary income rate of 39.6% for taxpayers with incomes above $1 million|
|Itemized Deductions||Itemized deductions generally provide a tax benefit equivalent to a taxpayer’s income tax bracket||Limit the tax benefit of itemized deductions to 28% for taxpayers earning more than $400,000
Restore the Pease limitation on itemized deductions for taxpayers earning more than $400,000
|Estate & Gift Tax Exemption||$11.58 million per person for 2020;|
$11.70 million per person for 2021 (subject to change)
|Return estate tax to 2009 levels: reduce the estate exemption to $3.5 million per person, with a top federal estate tax rate of 45%|
|Cost Basis at Death||Heirs receive property with a step-up in cost basis equal to fair market value||Eliminate the step-up in cost basis, though possibly with a base exemption|
|Corporate Income Tax Rate||21%||Raise to 28%|
|Section 199A Deduction||The Tax Cuts & Jobs Act created a 20% deduction for pass-through business income for certain eligible taxpayers||No explicit details, but presumed that taxpayers earning more than $400,000 may see the deduction phased out|
In order to achieve these tax policy proposals, Democrats would likely need to have control of both the House and the Senate. While Democrats ended up retaining control of the House, the path to gaining control of the Senate appears challenging. As it currently stands, Republicans have a narrow lead (50-48) in the Senate, with special run-off elections slated for January 5, 2021 for Georgia’s two Senate seats. If Republicans win at least one of the run-off elections, Republicans would maintain control of the Senate.
So where does this ultimately leave taxpayers? The safest bet is to execute certain tax and estate planning strategies prior to year-end 2020 to avoid risks associated with potential tax reform. For those that would prefer a ‘wait-and-see’ approach to see if tax reform legislation gains traction in 2021, we would offer the following insights:
• The Senate Matters, A Lot – The prospects for tax reform largely hinge on which party has control of the Senate. Republicans appear well-positioned to maintain a majority, needing to win only one of the two Georgia run-off elections. Should that occur, the chances for near-term tax reform are substantially diminished.
• Moderates Matter Too – Even if Democrats were to win both Senate run-off elections to get to 50 seats (with Vice President-elect Kamala Harris acting as a decisive tie-breaking vote), it is not guaranteed that all Democratic senators would fall in line with broader party proposals. This may particularly be the case for moderate Democrats as well as Democratic senators who hail from states that otherwise lean Republican.
• Proposals May Only be a Starting Point – Certain elements of the proposed Biden tax plan could be modified or even scrapped altogether. For example, there is already speculation that eliminating the step-up in cost basis (which could meaningfully impact inherited family businesses or family farms) could fail to gain broad support.
• Time Still on the Clock? – The current general consensus is that taxpayers may still have additional time to plan in 2021 due to a perceived reluctance by Congress to implement tax increases on a retroactive basis.
• Legislative Priorities & Economic Health – Given the ongoing COVID-19 pandemic, additional coronavirus-related stimulus and relief packages may take priority over tax reform legislation, which might further delay the implementation of any tax changes. Senator Richard Blumenthal (D-Connecticut) said Democrats will need to balance raising tax revenue with the health of the U.S. economy, noting, “I think a tax bill can be made effective at a time when we think the economy will be sufficiently robust that some increase in taxes will have no detrimental effect.”
High net worth individuals are strongly encouraged to coordinate with their SBK team to review whether potential planning opportunities should be pursued prior to December 31, 2020.