President Elect Biden's Tax Plan

When it comes to tax planning in a post-election, COVID-19 world there are many variables to consider. Whenever I am asked my thoughts, I give the CPA’s favorite answer “it depends on your specific situation”. The is no catch-all when it comes to tax. Think of it as a massive machine with multiple interdependent levers, pulleys, and buttons. As one gets pushed or pulled it influences other aspects of this machine that makes up your tax liability. With that in mind there are several aspects to take into consideration when analyzing the provisions of President Elect Biden’s Tax Plan. Below is my attempt to breakdown the more relevant aspects of Biden’s proposal and how it effects individual taxpayers.

Ordinary Income Tax Rate Increase

The first, and not nearly as impactful, is the increase of the highest graduated rate of tax from 37% to 39.6%. What does this mean? It means that for every dollar of income earn more than $520,000 for individuals and 620,000 for married filing joint, will be taxed at an increased rate of 2.6%. This makes headlines but is not nearly as impactful as other aspects of the tax plan. Because President-Elect Biden pledged to not increase taxes on anyone who makes less than 400,000, he can only make this subtle change to ordinary rates. To meet the income needs of his ambitious agenda he needs to manufacture tax revenue in different ways.

Social Security Tax Rate Increase

Social Security tax is a tax of 12.4% (split evenly between employer and employee) up to 137,700. Once your income exceeds 137,700 neither you nor your employer must pay this tax; you are phased out under the current tax code. Biden’s plan is to re-enact the tax for both the employer and employee on all wages that exceed 400,000. Essentially creating a donut hole in the Social Security tax between 137,701 and 399,999.

Capital Gains and Dividends Rate Increase

I buried the lead, the most potentially impactful provision of the President-Elect Biden’s tax plan, at least on the individual level, is the increase of the capital gains and dividends rate on incomes greater than $1,000,000 from 20% max rate to 39.6%. This is a massive increase that will generate the largest slice of the tax revenue pie. Not nearly as sexy a headline as “Biden is gonna raise your taxes” or “if you make less than 400k your taxes won’t increase” but a jarring increase over the current tax code.

Estate Tax Changes

A lesser discussed aspect of the individual tax provision affects the Estate Tax. Biden’s plan will expand the estate and gift tax by reducing the exemption amount to 3.5 million from 11.5 million and increasing the top tax rate for the estate tax to 45%. While not entirely clear there is discussion that there will also be an elimination of the step up in basis.

Child Tax Credit

Biden’s tax plan is proposing an increased child tax credit from 3,500 to $8,000 and increasing the maximum reimbursement rate from 35% to 50%. This aspect of Biden’s plan has garnered bi-partisan support in the past and reasonably expect to have a good chance to get passed regardless of the senate runoff elections in Georgia (more on that later).

Other Tax Plan Proposals

• Expand the New Markets Tax Credits and make them permanent
• Offers tax credits to small business for adopting workplace retirement savings plans
• Expand several of the renewable energy related tax credits
• Re-establishment of the first-time home buyers tax credit, up to $15,000

These provisions are all well and good but politically the question to be asked is, how much political capital will be spent in an attempt push through these tax changes during a global pandemic? My uneducated guess…juice is not worth the squeeze, at least on the individual level. I would imagine President Elect Biden would shelve much of these changes until we are clear of the effects of the pandemic.

There are only 2 ways to get a tax law changed, either permanently (which requires 60% of the senate to be onboard) or a temporary change through a budget reconciliation (50% plus a tie-break vote from the vice president).

Not breaking any news, the only way to get to a 50/50 split in the senate is for democrats to sweep both runoff elections in Georgia. That is a tall order for a historically conservative state. Let us say hypothetically democrats get both seats from Georgia, that means he can force through his changes, but to do so he can’t have a single defection amongst the democrats. Any splinter in the caucus between the progressives and the moderates and it does not get passed. A similar scenario played out a few years ago when Senator McCain went across the aisle and voted with the democrats to uphold the Affordable Care Act.

Take everything you just read with a grain of salt. Entirely way too many variables to consider. Everything must break right for Biden or everything written is just fodder for tax nerds.

For a more specific plan and how this may affect you I suggest you reach out to your tax professional

Christopher Abell, CPA