While the race for control of the Senate won’t be settled until January due to the run-off election in Georgia, President-elect Joe Biden has already released what his tax plan would look like. While his ability to make these changes depends on who ultimately controls the Senate, it is important to consider what changes Biden has proposed. The magic number you will hear regarding most of Joe Biden’s individual tax changes is $400,000.
Biden has proposed raising a several taxes on individuals that earn more than $400,000. One such tax increase would be an additional 12.4 percent Social Security tax, to be split evenly between employer and employee, on payroll earned above $400,000. The interesting part about this increase is that previously social security had a wage cap of $137,700 (adjusted annually for inflation), but this additional tax would leave a gap between that original cap and the new $400,000 base. This would mean that you could earn more than $137,700, but less than $400,000 and not have to pay the proposed additional Social Security tax.
Biden has also proposed raising the top individual tax rate from 37% back to the pre-TCJA rate of 39.6%. Biden would also raise the capital gains tax rate on those individuals earning over $1 million from 20% to 39.6, or the ordinary rate. It is important to note that Biden has come out and stated that there would be no change to capital gains rates for those earnings less than $1 million.
Biden is also proposing changes to itemized deductions for those earning over $400,000. He wants to cap itemized deductions to 28% of income and restore the Pease Limitation. The Pease Limitation, which was eliminated under the TCJA, imposes a 3% reduction on itemized deductions once taxpayers reach a certain income threshold. In 2017, the last year the Pease Limitation was in effect, the thresholds for when the Pease Limitation began started at an AGI of $261,500 for single taxpayers and $311,300 for married filing joint taxpayers. There has been no indication on what those thresholds may look like now if Biden is able to make these changes.
Another change that will impact owners of flow-through businesses is phasing out the Section 199A deduction for taxpayers with taxable income over $400,000. This deduction already has several limitations attached to the deduction, but Biden would look to impose the additional $400,000 of taxable income restriction on the deduction in addition to the already existing limitations.
Changes to the estate tax would also be made. Biden’s proposal includes eliminating the estate tax changes from the TCJA and restoring the amounts from 2009. Currently for estate tax purposes each taxpayer has a lifetime exclusion of $11.4 million plus any deceased spouse unused exception if a portability election was made. The 2009 estate tax lifetime exclusion was only $3.5 million. The maximum estate tax rate would also go from 40% to 45% under these same rules.
Individual changes aren’t the only changes Biden is proposing, corporate changes included in Biden’s tax plan include raising the tax rate from the flat 21% to 28%. Biden also wants to bring back a form of the alternative minimum tax for corporations with book profits over $100 million. The minimum tax would be structured so that you pay the greater of 15% of your book profits or your regular corporate tax. Biden is also looking to expand upon tax incentives that were created under the SECURE Act for small businesses to create qualified retirement plans. Details of these incentives have not been released to-date.
Overall Biden’s goal would be to raise taxes on wealthy individuals by increasing certain tax rates and limiting several deductions. He would look to increase the corporate tax by raising the rate from 21% to 28% and imposing a minimum tax for large corporations. Finally, he would decrease the lifetime exclusion and raise the maximum tax rate from 40% - 45% for estate tax purposes. All of these changes are dependent on what the results of the run-off election in January are in Georgia. If the Republicans retain control of the Senate then it will be nearly impossible for Biden to pass through these changes as currently constructed. We will continue to watch for additional updates and changes as they become available and after the results of the Georgia election become final in January.
For more information on President-elect Joe Biden’s proposed tax plan visit:
https://taxfoundation.org/joe-biden-tax-plan-2020/