ALL THINGS TAX

President-Elect Joe Biden’s Tax Proposals

The incoming White House administration can be expected to try to change the way Americans are taxed. The Biden administration will work to convince Congress to enact its preferred federal tax policies. It remains to be seen if changes will happen during 2021 or years later. Stay tuned.

Meanwhile, here are some interesting tax changes for individuals and businesses from the Biden administration’s wish list.

Individual

• Increase the top marginal tax rate from 37% to 39.6% for those with income over $400,000.
• Raise the tax rate on capital gains and qualified dividends for those making over $1 million. The current preferential rate is 20%, which would increase to 39.6%.
• Remove the $10,000 limit on itemized deductions for state and local taxes.
• Phase-out to ultimately eliminate the current 20% deduction relating to pass-through income (e.g. qualifying trade or business income and certain rental income earned through sole proprietorship, partnerships, LLCs, S-corporations).

Individual Tax Credits

• Increase the child tax credit from $2,000 to $3,000 (or $3,600 for children under 6 years old).
• Raise the child-care credit up to $16,000 for two or more children for individuals with income up to $125,000 per year.
• Allow the earned income tax credit to extend to workers older than 65 even if they do not have a qualifying child.
• Enact a new $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs.
• Enact a new refundable tax credit of up to $15,000 for first-time homebuyers.
• Enact a new renter’s tax credit for low-income taxpayers. This credit is designed so that rent and utilities are limited to about 30% of their income.

Corporation

• Currently, a flat 21% tax rate applies on taxable income of corporate taxpayers, commonly referred to as C-corporations. The new administration proposes to increase the tax rate from 21% to 28%.

Inheritance

• Eliminate stepped-up basis on transfers of appreciated property at death. Current rules provide for an adjustment to “step-up” to market value the cost of each asset owned by the deceased. Beneficiaries inherit the “stepped-up” cost which minimizes or eliminates capital gain taxes when the property is sold at a future time; presently, the taxable gain would only be the increase in value from the time of inheritance to the future date of sale. The new administration proposes to eliminate the “step-up” adjustment; as such, the beneficiaries will use the actual ‘old’ cost of the properties in determining capital gain. This scenario could result in higher capital gain taxes.

Estate and Gift

• The current amount exempt from estate taxation is $11,580,000 (year 2020) which will drop to $5.8 million after the year 2025. The Biden administration proposes to accelerate the reduction of the exemption amount.
• Estate tax applies to assets above the exemption. The new administration proposes to raise the estate tax rate from 40% to prior levels (possibly a 45% rate). Individuals should revisit their estate planning to determine any estate tax if the value of the exemption is eventually lowered. Keep track of your assets and their worth over time. How much real estate and some stock investments rose in value over the years might come as a surprise.

Good planning for your personal finances and small business means knowing what changes maybe in the works in 2021, before you make major financial decisions.

Next month this column will address further income tax, estate tax issues and related estate planning strategies for small businesses and residents on the Mendocino Coast.