As Present Joseph Biden settles into the role of President of the United States, many are wondering how his proposed tax plan will look or change as his proposed recommendations make their way through the House and the Senate to ultimately become law. A general observation from the new President’s proposed plan is that it favors enacting tax policies that would increase taxes on corporations and individuals making more than $400,000. Another general observation is that the tax increases would be generated by raising individual income, capital gains, and payroll taxes; phasing out popular deductions; and increasing the corporate income tax rate, including a corporate minimum tax.
Proposed potential changes for businesses include:
- Increase the corporate income tax rate from 21 percent to 28 percent.
- Enact an alternative minimum tax on corporations with book profits of $100 million or higher.
- Double the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
- Create a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure.
- Expand and make permanent the New Markets Tax Credit.
- Offer tax credits to small businesses for adopting workplace retirement savings plans.
- Expand 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.
Proposed potential changes for individuals include:
- Increase the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-2017 Tax Cuts and Jobs Act level of 39.6 percent.
- Tax long-term capital gains and qualified dividends at the new ordinary income tax rate of 39.6 percent on income above $1 million.
- Phase out the qualified business income (QBI) deduction for filers with taxable income above $400,000.
- Impose the 12.4% Social Security payroll tax on income earned above $400,000, evenly split between employers and employees.
- Equalize the tax benefits of traditional retirement accounts (such as 401(k)s and individual retirement accounts) by providing a refundable tax credit in place of traditional deductibility.
- Cap the tax benefit of itemized deductions to 28 percent for those earning more than $400,000.
- Restore the Pease limitation on itemized deductions for taxable incomes above $400,000.
- Provide renewable-energy-related tax credits to individuals.
- Expand 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 percent to 50 percent.
- Increase the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, and provide a $600 bonus credit for children under 6. The CTC would also be made fully refundable.
- Reestablish the First-Time Homebuyers’ Tax Credit to provide up to $15,000 for first-time homebuyers.
Potential Estate Tax Changes:
- Expand the estate and gift tax by reducing the lifetime exemption to $3,500,000 and increasing the tax rate to 45% in addition to eliminating the step-up of basis at death.
Other Potential Changes:
- Impose a new 10% surtax on corporations that offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.
- Establish an advanceable 10% “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment or expand manufacturing payroll.
- Expand the Affordable Care Act’s premium tax credit.
We are currently waiting to see what President Biden will present in his formal tax plan and will be watching closely to provide an update if and when any tax changes become law and go into effect.