As we approach the 2020 Presidential Election, we’ve been asked by our clients and professional colleagues what to anticipate from a legal and tax perspective under a possible Biden/Harris Administration.
Not surprisingly, the financial and tax policies put forth by the Biden campaign look dramatically different than those of the Trump Administration. We are not taking a stance one way or another; however, it is important for everyone to prepare for changes that may be coming in 2021 and beyond based on the facts that we have at our disposal.
The implementation of many of Vice President Biden’s proposals will also depend heavily on the makeup of the House and Senate following the election. If the government remains divided, the passage of the Biden’s signature tax proposals could prove difficult. There may be further questions of how much change is possible when factoring in the impact that COVID-19 continues to have on struggling businesses and working Americans across the country. Even small shifts to tax or monetary policy could prove dangerous to an already fragile economy…which may force the new Administration to set their proposals aside in favor of legislation that deals with specific COVID-19 relief (similar to Congressional interventions following the housing and auto crisis around 2007).
The bottom line is that while none of us have a crystal ball and 2020 continues to throw curveballs, the following is a general overview of what the Biden/Harris campaign–and the Democratic Party in general– are proposing to implement should they sweep the House, Senate and Presidency on November 3rd.
General Democratic Party Tax Policy Themes
- Additional payroll taxes on high-earners
- Increase the marginal rate imposed on high-income individuals
- Increase the capital gains rate imposed on high-income individuals
- Tax wealth generally; various ideas include an annual wealth tax & greater estate & gift taxes
- Increase the corporate income tax rate
Biden/Harris Specific Tax Policy Proposals
Under Biden’s plan, the highest-income households would see substantially larger tax increases than households in other income groups, both in dollar amounts and as share of their incomes. This includes:
- Tax increases on over $400,000 of income
- Expand the 12.4% Social Security tax
- Restore the 39.6% marginal rate
- Cap the itemized deduction tax benefit to 28%
- Restore the 3% PEASE limitation
- Add a new Section 199A Deduction Phaseout
- Taxes on Capital – 39.6% rate applied to capital gains over $1,000,000
- Eliminate the Basis “Step-up” at Death
- Increase the Child and Dependent Care Tax Credit from $6,000 to $8,000
- Expand the ACA premium credit
- Expand the EITC for childless workers over 65
- New renewal energy tax credits
- First time home buyers tax credit
- Renters credit for those who are “housing cost burdened”
- Expanded retirement savings credit
Payroll taxes consist of 6.2% that an employee pays into Social Security and 6.2% an employer pays for Social Security, combining for a 12.4% payment. In addition, the employer and employee pay 1.45% apiece (a combined 2.9%) for Medicare taxes. They currently pay the 12.4% only up to the first $137,700 a person earns.
Biden wants the 12.4% Social Security tax to kick back in for incomes above $400,000.
Biden wants to put the top income tax bracket rate back to the Obama-era’s 39.6% rate from its current 37% rate. This will raise taxes for anybody making over $400,000.
Biden would also cap the value of itemized deductions. When taxpayers prepare their taxes, they can choose between a standard deduction and an itemized one that is comprised of things like state and local taxes expenses, mortgage interest, charitable contributions, and medical expenses.
Specifically, Biden would cap the value of the itemized deduction at 28%. That cap would apply even if a taxpayer were taxed at a higher rate
Biden is also calling for a maximum $15,000 first-time homebuyer’s credit, a tax credit for renters and a larger tax credit for children.
Capital Gains Tax
Biden wants to tax capital gains at 39.6% (his proposed top rate for ordinary income) for people who make more than $1 million. Right now, the rate is set at 20%, along with 3.8% for the net investment income tax.
Step-up in basis
Biden has also proposed eliminating the step-up in basis for inherited capital assets, which means more taxes on wealth passed to heirs.
Federal Estate Tax Exemption
Biden is also looking for the federal estate tax exemption to be lowered from $11.58 million (for 2020) back to pre-tax reform levels (around $5 million), which would subject more estates to the tax.
Trump enacted the SECURE Act. The SECURE ACT lets more employers provide annuities as a 401(k)-investment option. The law also pushes the required minimum distribution age from age 70.5 to age 72 and gives tax credits to businesses that automatically enroll workers in their retirement plan.
Biden is calling for a 26% refundable tax credit that applies for each dollar contributed to an IRA or 401(k). “The tax credit would be deposited into the taxpayer’s retirement account as a matching contribution,”
The Biden/Harris proposal is to raise the corporate income tax from 21 percent to 28 percent.
Biden proposes to keep and improve Obamacare. As part of his plan to do this, he would eliminate the income-based cap on the premium tax credit so that all families who purchase insurance through a health insurance exchange can claim the credit.
Other Changes Proposed by The Biden Campaign
- Temporarily increasing the child tax credit to $3,000 per child for children ages 6 to 17 and to $3,600 for children under 6 and making it refundable and payable in advance.
- Forgiving student loan debt and excluding the forgiven amount from taxation.
- Expanding the work opportunity tax credit to include military spouses.
- Enhancing tax breaks and access to 401(k) plans for workers who are saving for retirement, including “equalizing” the tax benefits of 401(k) plans (possibly through a tax credit instead of a tax deduction for contributions);
How Does This Apply to Me and My Family?
If you have read through this exhaustive list of campaign proposals and now feel overwhelmed or unsure of how any of these changes may apply to your family or financial situation… rest assured, you are not alone. Tax policies can be complicated and frustrating, even for the professionals. However, please know that we are here to answer your questions and work with you to ensure that you prepared legally and financially for any changes that may lie ahead. If you’d like to speak with one of our attorneys or tax professionals, please contact us to schedule an appointment.