During his presidential campaign, Joe Biden outlined his tax policy proposals1, which included rolling back key provisions from the Tax Cuts and Jobs Act (TCJA). An analysis by the Tax Foundation estimated the Biden plan would raise tax revenue by $3.3 trillion over the next decade.
Biden Tax Plan
Top Individual Federal Income Tax Rate
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 &
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 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
$11.70million 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
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 will 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.
- Mark Luscombe, a CPA, attorney and principal analyst for Wolters Kluwer Tax & Accounting commented that newly elected presidents “have a pretty good record of getting things through during their first year in office… assuming [tax reform is] passed in 2021, any legislation probably won’t be effective until 2022. Congress seems to be hesitant to make tax hikes retroactive.”
- An analysis by Grant Thornton2 noted “retroactive tax rate increases are relatively rare, but not unprecedented. There have been six major rate increases since 1980 and… only the 1993 increases in the corporate and individual rates were retroactive” [passed August 1993, but effective as of January 1, 1993].
- 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 accountant and estate planning attorney to review whether potential planning opportunities should be pursued prior to December 31, 2020. Please do not hesitate to reach out to our team. We are here for you and want to be a resource to discuss the impact of potential policy changes on your portfolio and the markets.