How Will The Election Change Your Tax Situation?
Many clients are beginning to ask the question, “What does the current election do to my tax situation?” We will not have a formal winner of the Presidential election until all the states certify their votes and the electoral college meets and votes. The date of the Electoral College vote is scheduled by federal law as the second Wednesday in December of a presidential election year. In 2020, the meeting date is December 14th.
While the formal outcome of the election is over a month away, here is a summary of the Biden Tax Plan as best we can determine. Please keep in mind that these proposals are not part of the 2020 law and will only become part of the 2021 law following a bill being proposed and then voted on by the House and the Senate. So it is very early to be projecting the changes to the tax law for 2021.
We will continue to update you on this issue as additional information is available and the election is certified by the Electoral College process.
Biden’s plan includes the following payroll tax, individual income tax, and estate and gift tax changes:
- Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
- Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
- Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.
- Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
- Restores the limitation on itemized deductions for taxable incomes above $400,000.
- Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
- Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
- Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
- For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
- Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
- Expands the estate and gift tax by restoring the rate and exemption to 2009 levels.
Biden’s plan also includes the following proposed business tax changes:
- Increases the corporate income tax rate from 21 percent to 28 percent.
- Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
- Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
- Expands the New Markets Tax Credit and makes it permanent.
- Offers tax credits to small business for adopting workplace retirement savings plans.
- Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.
Other proposals that are being discussed:
- Imposing a new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate tax rate on this activity up to 30.8 percent.
- Establishing an advanceable 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.
- Equalizing the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.
- Eliminating certain real estate industry tax provisions.
- Expanding the Affordable Care Act’s premium tax credit.
- Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income.
- Increasing the generosity of the Low-Income Housing Tax Credit.