With what looks like a Democrat sweep of the Georgia Senate runoff races and a razor-thin Democrat majority, it’s time to take a much closer look at President-elect Joe Biden tax plan.
Biden has proposed a number of new taxes aimed at the wealthy and chief among them is a return to the top tax tier of 39.6% for those earning $400,000, although he hasn’t specified if that will be for single filers, joint filers or both.
“If you're below that, you'd be pretty safe from seeing your tax rate increase under his plan,” said Jeff Levine, director of advanced planning at Buckingham Strategic Wealth.
Biden also proposes eliminating the qualified business income (QBI) deduction for anyone with income more than $400,000. Today, the QBI works as a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. In general, total taxable income in 2020 has to be under $163,300 for single filers or $326,600 for joint filers to qualify.
Biden also wants to replace IRA and 401(k) tax deductions with a flat credit. “That would be a big benefit for those with more modest incomes, while hurting those with higher incomes. The Biden plan would also nix beneficial treatment for stock option plans for high earners, making Roth accounts far more likely to be the better option going forward,” Levine said.
On the capital gains side of the equation, the top rate would equal the ordinary income tax rate for income in excess of $1 million. That’s a big change.
The Biden tax plan also eliminates the step up in basis for capital assets and would make death a realization event. “Basically your assets would be treated as sold upon your death and capital gains taxes would be owed,” Levine said.
Finally, on the estate and gift tax planning side, Biden has proposed scaling back the current exemption amounts to historical levels. Certainly, the doubling of the estate tax exemption likely goes away. At various times, Biden has supported going back to the $5 million pre-Tax Cut and Jobs Act (TCJA) rate schedule level, while at other times, he's supported going back to a $3.5 million exemption.
“In either case, the number of people who'd have to worry about the estate tax would dramatically increase, though it would still be a very first-class problem,” Levine said.
The SALT deduction cap, which TCJAS set at $10,000 for single taxpayers and married couples filing jointly and $5,000 for married taxpayers filing separately, is also likely to disappear under Biden.
What types of spending will the Biden administration and a Democrat majority need tax revenues to accomplish? A massive new stimulus package, bailouts for ailing state governments which took major tax revenue hits during the pandemic, a push for Medicare-for-All, and parts of the Green New Deal would appear to be back on the table. Stimulus and state bailouts are likely to top the list.