It’s hard to believe we are already several weeks into 2021! Here is a quick review of the current balance of power in Washington: Democrats have secured a slim majority in the house, split the senate 50/50 with Kamala Harris serving as the tiebreaker, along with a Biden presidency.
So what does this mean?
In short, the likelihood that Biden’s tax legislation agenda will pass has significantly increased. Here is a quick summary of some of the potential changes that are on the floor for consideration:
Changes Affecting Individuals:
- Imposes a 12.4% payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
- Reverts the top individual income tax rate for taxable incomes above $400,000 from 37% under current law to the pre-Tax Cuts and Jobs Act level of 39.6%.
- Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1 million.
- Eliminates step-up in basis for capital gains taxation on estate assets at death.
- Caps the tax benefit of itemized deductions to 28% of value for those earning more than $400,000.
- Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.
- Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
- Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+.
- Provides renewable-energy-related tax credits to individuals.
- Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35% to 50%.
- For 2021 and if economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger while providing a $600 bonus credit for children under 6.
- Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
- Expands the estate and gift tax by restoring the rate and exemption to 2009 levels of $3.5 million per person down from $11.58 million in 2020.
Changes Affecting Businesses:
- Increases the corporate income tax rate from 21% to 28%.
- Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15% minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
- Establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure.
- Expands the New Markets Tax Credit and makes it permanent.
- Offers tax credits to small businesses for adopting workplace retirement savings plans.
- Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.
If you are unsure of how your specific tax situation may be affected, or any planning changes you should be considering as a result of this, please feel free to reach out for a no-obligation consultation.