Biden’s tax plan consists of proposals that would raise taxes on higher income earners and businesses while providing tax breaks for specific economic activities and households. It remains to be seen if any of these proposals will be successful given the current economic and political landscape. Highlights of the plan are set forth below.
Increase in the corporate income tax rate. Biden has proposed an increase in the corporate tax rate from 21% to 28%. This rate is lower than the 35% tax rate that was in effect prior to the Tax Cuts and Jobs Act
Institute a minimum corporate tax rate. Biden has also proposed a minimum tax of 15% on companies with $100 million or more in annual net income. The Tax Foundation notes that this minimum tax is set to operate like an alternative minimum tax, with corporations paying the greater of their normal income tax rate or 15%. Net operating losses will continue to carry forward and foreign tax credits will continue to be available.
Double the GILTI tax rate. Biden’s tax plan would also double the tax rate on Global Intangible Low-Tax Income (GILTI) earned by foreign subsidiaries of U.S. companies. Currently set at 10.5%, the GILTI tax rate would increase to 21%.
Institute a financial risk fee. Biden has proposed a financial risk fee on financial institutions with over $50 billion in assets. The fee would be based on a financial institution’s covered liabilities and would provide the Federal Deposit Insurance Corporation (FDIC) a pool of funds to use when conducting the orderly liquidation of a failed financial institution. The fee would ensure that bank customers wouldn’t be on the hook for these fees. Instead, a collective group of big banks would pay into a fund each year to cover any FDIC oversight expenses.
Increase the individual marginal income tax rate. Biden would return the top marginal income tax rate to 39.6%. For the 2020 tax year, this top marginal rate applies to earned income above $518,400 for single filers and over $622,050 for married couples filing jointly.
Reinstitute the payroll tax on the top 1%. Currently all income between $.01 and $137,000 is subject to the 12.4% payroll tax that funds Social Security. Biden has proposed reinstating this tax for income above $400,000. Income between $137,000 and $400,000 would continue to be exempt.
Increase the rate of capital gains tax on filers with incomes above $1 million. Biden’s proposal would tax filers with over $1 million in income at ordinary income tax rates. The Net Investment Income Tax (NIIT) would continue to apply to these filers for a total tax rate of 43%.
Limit itemized deductions. Biden has proposed a cap on itemized deductions of 28%. This is to say that for each dollar of itemized tax deductions, including charitable contributions, a taxpayer or couple filing jointly would only receive a maximum benefit of $0.28.
Phase out small business income deductions over $400,000. Biden would phase out small business income deductions over $400,000. Currently qualified pass-through business deductions, which allows small business owners to deduct up to 20% of their business income, are capped at $163,300 for single filers and $326,600 for joint filers in 2020. However, for individuals and couples earning over these thresholds, an abundance of rules exist that determine whether or not you’re allowed to take qualified business income (QBI) deductions. Biden’s plan would simplify these rules by allowing QBI deductions for those persons with less than $400,000 in earnings, but phasing out pass-through deductions for those with over $400,000 in earnings.
Institute a first-time homebuyer credit. Biden has proposed a new homebuyer’s tax credit of up to $15,000 for first-time homebuyers intended to aid such buyers in covering the initial costs and fees associated with purchasing a home.
Increase the child and dependent care tax credit. Under current law, parents of children under the age of 13 or those who take care of a disabled dependent living in their household are eligible for a credit based on their expenses to care for a child or disabled dependent. This credit is equal to 35% of up to $3,000 in qualified expenses for one dependent or $6,000 for two or more dependents. This effectively means this tax is worth up to $2,100. Biden would expand this to $8,000 for individuals and $16,000 for multiple dependents, adjusting the reimbursement percentage to 50%.
Replace tax deductions with a 26% refundable credit for contributions to defined benefit plans. Currently taxpayers may deduct contributions to defined benefit plans such as 401(k) plans. Under the proposed plan, the deduction would be replaced by a 26% refundable credit giving low-income earners the same savings as high earners. It is not presently clear how this change might impact savings by high earners, though it is expected that a credit may possibly induce greater savings by low-income earners as the tax benefit will increase significantly.
Eliminate the stepped-up basis. Biden’s plan would end the practice of stepping-up the cost basis of inherited property to fair market value at the time of death. Without the stepped-up basis, taxpayers will have to recognize a greater amount of capital gain.
Repeal the rules related to like-kind exchanges. Current law allows taxpayers to avoid paying capital gains taxes on the sale of real property if the sales proceeds are invested in replacement property valued the same as the original property within 180 days of sale. Biden has suggested that this provision could potentially be repealed in order to raise revenue for other initiatives.
Increase the estate tax rate. Biden has not specifically suggested raising the estate tax rate which is currently set at 40%; however, it is conceivable that tax reform could include an increase in the estate and gift tax rates.
Decrease in the estate and gift tax exemption. The current estate and gift tax exemption of $11,580,000 is set to decrease on January 1, 2026 to $5,000,000 (indexed for inflation). Biden has suggested that the exemption related to generation-skipping tax (levied when transfers are made to or for the benefit of someone two or more generations younger than the transferor) be set as low as $3,500,000 per individual and that the exemption for gifts could set as low as $1,000,000.
Institute credits which would encourage specific activities. Biden has proposed various tax credits meant to encourage certain activities such as carbon capture and storage though the parameters of those proposals have not been entirely fleshed out. They are as follows:
- Reinstate the Electric Vehicle Tax Credit;
- Provide tax credits for residential energy efficiency;
- Reinstate the Solar Investment Tax Credit;
- Make the new markets tax credit permanent;
- Institute a manufacturing communities tax credit;
- Institute a renter’s credit up to 30% of income;
- Expand the Earned Income Tax Credit for those older than 65;
- Provide a $5,000 tax credit for informal care providers;
- Expand the Low-income Housing Tax Credit; and
- Institute a credit for childcare facilities built by businesses.