Matt Hagan, Staff Accountant
2021. The year we’ve all been waiting for… well, at least for the past several months. A worldwide pandemic, civil unrest, and record breaking natural disasters have all shown up. I think it’s safe to say, we are all ready for a change. This month Joe Biden will be sworn in as the next President of the United States, and he will be bringing with him a lot of those changes, including quite a few to the tax laws. Will they pass? It all depends on the Senate races. For now, let’s dive into some of the changes in his proposal.
A major theme in the president-elect’s new proposal is an increase in the amount of taxes certain individuals will pay. As of now, the wealthiest individuals pay taxes at the rate of 37% of their income. The Biden plan would increase that to a pre-Trump rate of 39.6%. Another big change would be how capital gains are taxed for individuals who earn over $1 million dollars in income. Today, they only pay the capital gains rate of up to 20%, whereas under the new plan the gains would be taxed as ordinary income. That would be a significant increase for investors, to put it mildly. In that same vein, the new plan would repeal the “step up in basis” law that protects heirs from additional tax burdens. The step up law increases the tax basis to the actual market value upon inheritance. If this part of the tax law was to change, not only would this affect the wealthy heirs, but the modest and low income as well. Payroll and Social Security are other areas that would be affected under the new plan, as persons earning above $400,000 per year would see an increase in the amount of taxes taken. In addition, Biden proposes to reduce the tax benefit of itemized deductions down to 28% of AGI.
Is it all bad news and gloom? Not at all. Biden’s new tax platform offers up several areas of promise and relief for those lower on the socio-economic scale as well. Currently the Child and Dependent Care Tax Credit is limited to $3,000 for qualified expenses, and the new plan would raise that up to $8,000. The Child Tax Credit would also raise from $2,000 to $3,000, and be made fully refundable. Tax credits for families who provide care for individuals with special needs would be given, up to $5,000. The Earned Income Credit, now limited to those 65 and under, would not have an age limit in effect. Biden wants to reinstate tax credits for energy efficiency, as well as giving refundable credits to low income renters. He also wants to give first time home buyers a $15,000 credit, which would help many families when they might need it the most. One particular proposal that the President-Elect has in the new bill is partial student loan forgiveness. The exact amount isn’t written in stone, but the general consensus is up to $10,000. This could prove to be a point of contention, as this portion of the bill has many opponents. For more on this particular topic, see our December issue for a well-written article by Dustin Wells that goes over many of the issues surrounding the loan forgiveness proposal.
Corporations could be in for some big changes as well if Biden’s tax plan does indeed make it through the Senate. The passage of the Tax Cuts and Job Act of 2017 included a 21% flat tax rate for corporations. The new tax law would raise that to 28%. In addition, corporations with over $100 million in book income would be subject to a 15% minimum alternative tax, which would prevent profitable companies, like Amazon for instance, from paying no tax at all.
Just as with individuals, there are bright spots for Corporations as well. To attempt to reduce environmental impacts, Biden will offer additional tax credits for investment in emission reduction, low carbon engineering and green energy infrastructure. Renewable energy investments will be rewarded with tax credits as well. In the hopes of keeping more of our new investments here in the United States, a 10% credit will be given for domestic manufacturing. The New Markets Tac credit would be expanded and made permanent.
As you can see, a change is coming. How much of one, and the benefits and drawbacks it may have for you as an individual or as a business owner will remain to be seen. It appears to be a healthy mix of both, although proponents and opponents are numerous, and are willing to share their thoughts with you at the mention of it. Tune in and find out what will happen this month.