President Biden campaigned on a broad agenda, including a pledge to roll back many of Former President Trump’s tax policies. In response to the Tax Cuts and Jobs Act of 2017 (TCJA), Biden has promised a progressive approach to taxation. Here are some of the most significant proposals that could affect individual and business tax liability if enacted.
Please note that none of these provisions have been passed. This is a list of proposals that have not been signed into law.
Proposals for individual taxes
Tax rates: Biden has not pushed for a wealth tax. He would, however, return the top individual tax rate to 39.6%, the pre-TCJA rate, from 37%. The current rates for all other tax brackets would remain in place.
Social Security taxes: Biden has proposed new payroll taxes on those earning $400,000 or more. Currently, employers and employees pay a combined 12.4% on the first $137,700 (adjusted for inflation) of an employee’s earnings for Social Security tax.
Biden’s approach would create a “donut hole” where income from $137,700 to $400,000 would not be subject to the tax. The hole would slowly close over time as the lower threshold creeps up closer to the static upper threshold due to inflation.
Capital gains taxes: Taxpayers earning more than $1 million would face higher capital gains taxes. Gains would be taxed at their ordinary income rate, 39.6% — or, effectively, 43.4% when combined with the 3.8% rate for net investment income tax (NIIT). That is almost twice the current rate of 23.8% (20% capital gains rate plus 3.8% NIIT rate).
Child tax credit: Biden would expand the child tax credit. Currently, the credit is $2,000 for each qualifying child under the age of 17 with up to $1,400 of it refundable. (A refundable tax credit means you get a refund, even if the credit is more than what you owe.) The child tax credit begins to phase out at $200,000 of modified adjusted gross income for single taxpayers and $400,000 for married couples filing jointly.
Biden would increase the credit at $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. He also would make it fully refundable.
Credits for caregiving: Biden would establish a new tax credit up of up to $5,000 for “informal caregivers” of aging family members. In addition, he would expand the child and dependent care credit from a maximum of $3,000 for one qualifying individual or $6,000 per family, to a maximum of $8,000 for one or $16,000 per family. 50% of the credit would be refundable.
Housing tax credits: New refundable housing credits would be available as well. Biden seeks a credit of up to $15,000 for eligible first-time homebuyers — which would be collected at the time of purchase, rather than requiring taxpayers to wait until they file their tax returns. He also proposes a credit for low-income renters that would keep rent and utility payments to 30% of monthly income.
Limits on itemized deductions: Biden proposes to limit the tax benefit from itemized deductions to 28% for taxpayers whose income exceeds $400,000. In other words, each dollar of allowable itemized deductions could reduce income tax liability by no more than $0.28.
Biden also would restore the “Pease limitation” that the TCJA repealed through 2025. The limitation reduces itemized deductions by 3% for every dollar that a taxpayer’s adjusted gross income (AGI) exceeds a specified income threshold. Biden would adopt a threshold of $400,000.
Biden proposes eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes, which particularly hurts taxpayers in high-tax states such as California, Illinois and New York.
Retirement saving incentives: Biden favors a refundable tax credit (rather than a deduction) for each dollar contributed to certain retirement accounts, such as 401(k) plans and IRAs. This would reduce the savings benefit for higher-income taxpayers who could claim deductions that reduce their AGI for their contributions.
Proposals for business taxes
Corporate taxes: Biden’s intention to raise the corporate tax rate probably has garnered the most attention on the business side. The TCJA reduced the rate from 35% under the Obama administration to 21%. Biden would land on the middle ground, raising it to 28%.
Biden also would impose a 15% alternative minimum tax on reported book income (rather than the taxable income reported on corporate tax returns), for corporations with at least $100 million in annual income.
Qualified business income (QBI) deduction: Through 2025, taxpayers generally can deduct up to 20% of their QBI from a pass-through entity (sole proprietorship, LLC, partnership or S corporation). Phaseouts begin at higher income thresholds — for 2020, they kick in when taxable income exceeds $163,300 for single taxpayers or $326,600 for married couples) — and other limitations also apply. The QBI deduction reduces the effective top rate for these taxpayers from 37% to 29.6%.
Biden would simplify the deduction by not allowing it for individuals earning more than $400,000. Those taxpayers could see a 10% jump in their tax rate, from 29.6% to the 39.6% top tax rate. He also would eliminate the deduction for rental real estate activities.
Proposals for estate taxes
The TCJA slashed estate taxes, cutting the top rate from 55% to 40% and temporarily doubling the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. For 2021, it is $11.7 million and $23.4 million, respectively.
Biden has indicated he would like to roll back the exemption to $3.5 million for estate taxes. He would exempt $1 million for the gift tax and impose a top estate tax rate of 45%.
Biden also aims to end the so-called step-up in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. The current rule allows for an increase in the basis of inherited assets upon death and correspondingly reduces the gain recognized by the beneficiaries upon a sale of inherited assets. The Biden proposal would remove the date of death step-up and preserve the taxation of gain resulting from increases in the value of inherited assets during the decedent’s life.
Even though none of these provisions have been passed, DGC’s Commercial Business Group and Private Client Group are working closely with clients to determine how President Biden’s tax proposals will impact their individual and business tax situations. If you have any questions about these proposals, please reach out to a member of your DGC client service team or Scott Thomas, JD, LLM at 781-937-5172 / firstname.lastname@example.org or Catherine Doe, CPA at 781-937-5331 / email@example.com.