Higher taxes on income and transfer taxes are around the corner!
President-elect Joe Biden’s plan aims to amend higher taxes on corporations and high-income individuals while protecting taxpayers with incomes of less than $400,000 from tax rate increases.
Please keep in mind that this proposal would need to be passed by Congress to become law, and any of its provisions may be revised or eliminated in the future.
In this article, you will see the possible rate changes on the current tax law:
Changes in the Tax Rates
Ordinary Income: Currently, the top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly.
After Biden’s plan, the ordinary income tax rate would be 39.6% for taxable income above $400,000.
Preferential Income (Long-term capital gains, dividends): According to current tax law, the top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly.
The preferential tax rate for those tax taxpayers making more than $1 million would increase from 20% to 39.6% with Biden’s plan.
Pass-Through Income: Currently, if you run a partnership, corporation, or individual company, your pass-through income is eligible for a 20% deduction until 2025.
After Biden’s proposal, 20% deduction would only apply to the taxpayers whose income is more than $400,000.
Corporate Tax: One of the provisions of the Tax Cuts and Jobs Act (TCJA) was the reduction in the corporate tax rate to 21% from its prior-law level of 35%.
Biden’s proposal would increase the corporate tax rate from 21% to 28%.
Carried Interests: According to current tax law, the top rate applicable to long-term capital gains is the 20% rate for carried interest, which applies to carried interest if held for more than three years.
Within Biden’s plan, carried interests would be taxed at ordinary income rate, %39.6.
Estate and Gift Tax Rate: Biden’s proposal would increase the estate and gift tax top rate from 40% to 45%.
Unified Credit / Lifetime Exclusion Amount: The lifetime gift tax exemption amount is the amount individuals can give away during their lifetimes without having to pay any gift taxes on the transfer to the recipients.
In 2020, the lifetime exemption amount is $11.58 million per person. This amount was temporarily increased under the Tax Cuts and Jobs Act of 2017 (TCJA), which went into effect on January 1, 2018. Before that, the lifetime exemption amount was approximately $5.5 million per person.
After Biden’s plan, it seems that the lifetime exemption amount will be lowered to pre-2018 levels before 2025, which would be somewhere around $5.5 million but potentially may fall to levels as low as $3.5 million per person.
Date of Death Basis step-up: Step-up on the basis which is the readjustment of the value of an appreciated asset for tax purposes upon inheritance would be repealed with Biden’s Tax Plan.
What Else Would Biden’s Tax Proposal Bring?
- Renewable energy incentives and restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit
- Payroll taxes (15.3% combined Social Security and Medicare Taxes) which apply to wages above $400,000
- Limit itemized deductions by restoring limitations for those with income greater than $400,000
- Canceling of the cap on state and local tax deduction
Takeaways
- Is your annual income of more than $400,000? If so, you need to take a look at Biden’s Tax Proposal.
- To avoid the possible increase in the preferential income tax rates, consider accelerating your capital gains and dividend income realizations.
- To defer the capital losses, consider NOL carryforwards
