With just a few weeks until Inauguration Day, it’s not too early to start looking into the crystal ball of tax changes that may be on the horizon under the new administration. The tax landscape could significantly change in some areas, and depending on the timing of the new tax law, taking advantage of the current tax rates is the safest play for most.
Before we get into some of Biden’s proposed tax changes, let’s first look at the “will” and “when” to any potential changes in the future.
Will the proposed tax changes pass?
Any proposed tax changes must be passed by Congress for it to be a written law. As it currently stands, the House of Representatives are controlled by the Democrats, and the Senate is 50-48 in favor of the Republicans, with Georgia’s two Senate seats now in a runoff to be decided in early January. If Georgia can flip the seats to make the Senate a 50-50 share, with future Vice President Kamala Harris owning the tie-breaking vote, the Democrats would essentially control the Senate as well. From a political standpoint, the Georgia Senate race is a significant one when considering national tax changes.
When would the tax changes take effect?
If new tax law is passed, it is a real possibility that these changes could be made retroactive to January 1, 2021. This would take some quick implementation from Biden’s team, but it is not an impossible feat. It is more likely that any changes would be put into effect beginning January 1, 2022, mirroring the timeline of Trump’s Tax Cuts and Jobs Act that took effect in 2018, one year after he took the office.
Now that we’ve set the stage, let’s take a look at some of Biden’s significant tax proposals:
Estate Tax
Currently, individuals with estates less than $11.58 million ($23.16 million for married taxpayers) can pass their wealth to the next generation estate tax free. Any estates in excess of those amounts would be taxed at a 40% rate. Biden’s proposal significantly reduces the estate tax exemption to $3.5 million ($7.0 million for married taxpayers), while also increasing the estate tax rate to 45%. These types of changes result in millions of additional taxes depending on when the wealth is transferred. Thus, if you were already considering passing estate money to the next generation, consider 2021 a good time to do it.
Capital Gain Tax
The proposal would increase the capital gain rate from 20% to 39.6% for taxpayers with income in excess of $1 million. When considering the sale of stock, assets, or businesses in the near future, consider how the timing could impact the taxable amount.
Charitable Donations
The proposal would decrease the cap on itemized deductions from 37% to 28% for taxpayers with income in excess of $400,000. This means for every $100,000 charitable contribution, your tax benefit would decrease from $37,000 to $28,000 under the proposed changes. If you were already planning to make a sizeable donation, making the donation under the current tax law is more beneficial.
Other Tax Rates
Corporate tax rates increase from 21% to 28%.
12.4% increase in Social Security payroll tax for income earned above $400,000.
Phases out qualified business income deduction (Section 199A) for income earned above $400,000.
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