Biden Tax Plan: Everything You Need to Know

Former Vice President Joe Biden secured the presidency in one of the most harrowing, divisive, and unprecedented elections in history. Biden is facing an uphill battle once he takes office as the United States continues to struggle with the coronavirus pandemic and its negative impacts on the economy. 

He has already signaled his interest in immediately addressing the COVID-19 pandemic and providing additional fiscal stimulus for taxpayers and small businesses hit hard by mass shutdowns earlier this year. Biden has also made some big promises around student loan forgiveness and fixing the nation’s healthcare system. 

However, each of these significant undertakings will require substantial funding all while the country continues to face record levels of national debt and a massive government spending deficit. As a result, Biden will undoubtedly need to make some very difficult decisions about tax policy in the coming years.

So far, Biden has laid out a number of tax increases for high income individuals and corporations across payroll taxes, individual income taxes, estate and gift taxes, and business taxes. Many taxpayers are already worried about how these proposed changes could directly affect them and how they should prepare.

Below, we outline all of the key details of the Biden tax plan and cover everything you need to know.

Overview

Biden’s tax plan largely focuses on increasing tax rates on high-income individuals and corporations.

His proposed legislation would repeal the major tax reductions passed in 2017 under the Tax Cuts and Jobs Act and increase tax rates across payroll taxes, individual income taxes, and estate and gift taxes for taxpayers making over $400,000 per year. Those making less will generally not see increases.

For corporations, the Biden tax plan also proposes raising the corporate tax rate alongside several other business tax changes covered in the “Corporations” section later in this article.

Key Details for Individual Taxpayers

Biden’s tax plan includes the following proposed changes to payroll taxes, individual income taxes, and estate and gift taxes for individuals^[1]:

• Adds a 12.4% Social Security payroll tax on income earned above $400,000. This additional tax would be split evenly between employers and employees. The current Social Security wage cap is still $137,700 so no additional tax would be imposed on wages between $137,700 and $400,000.

• Increases the top individual income tax rate from 37% to 39.6% for taxable incomes above $400,000.

• Taxes long-term capital gains and qualified dividends as ordinary income for taxpayers with income over $1 million.

• Eliminates the step-up in basis for capital gains taxation.

• Limits the tax benefit of itemized deductions to 28% of taxable income for those earning more than $400,000. Currently the cap is 100% of income.

• Brings back the Pease limitation on itemized deductions for taxable incomes above $400,000.

• Reduces the lifetime estate and gift tax exemption from $11.58 million for single filers (twice the amount for married couples) to $3.5 million.

• Reestablishes the First-Time Homebuyers’ Tax Credit, providing up to a $15,000 tax credit for first-time homebuyers.

• Expands the Earned Income Tax Credit (EITC) for childless workers over age 65.

• Adds renewable-energy-related tax credits for individual taxpayers.

• Expands the Child and Dependent Care Tax Credit (CDCTC) and Child Tax Credit (CTC) for lower-income families.

• Equalizes the tax benefits for contributions to 401(k)s and other retirement plans across the income scale by providing a refundable tax credit in place of the traditional dollar-for-dollar deduction as it exists today.

• Provides refundable tax credits for healthcare premiums to help limit families’ overhead on insurance premiums to no more than 8.5% of their income.

• Provides tax relief on student loans by eliminating any tax liability on balances forgiven after 20 years. Currently, borrowers must pay ordinary income tax on these balances. 

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Key Details for Corporations

Biden’s tax plan for corporations mainly targets those earning more than $100 million per year and those that export jobs overseas, but there are some proposed changes that would affect small business owners, namely[2]:

• Raising the corporate income tax rate from 21% to 28%. This would impact S and C corporations regardless of size.

• Phasing out the qualified business income deduction (Section 199a, AKA “QBI”) for pass-through business owners with taxable income above $400,000.

• Establishing a Manufacturing Communities Tax Credit to help reduce the tax liability of businesses that experience layoffs or a major government institution closure.

• Expanding the New Market Tax Credit which incentivizes businesses to make investments in low-income communities. The new rules would also make this tax credit permanent.

• Offering tax credits to small businesses for adopting retirement savings plans (e.g., 401(k), SIMPLE IRA, SEP IRA).

A number of other proposals have been mentioned in the past, such as expanding the Affordable Care Act’s premium tax credit or establishing an advanceable “Made in America” tax credit, but there’s still little to no detailed information on these so we chose to leave them out.

What’s Next 

At this point, all anyone can do is speculate. The elections in the Senate and House of Representatives are still not final as of this writing. If both political parties have majorities on either sides (i.e. Democratic House, Republican Senate), Congress could potentially deadlock on passing legislative bills. 

Biden would have to turn to his executive order powers in order to get anything done, which could be easily overturned by judicial review or require approval by the legislative branch. In other words, executive orders are not the same as enacting law. 

Essentially, Biden’s ideal scenario is a Democratic-led Senate and House, but if that doesn’t happen, at least a Congress that can get along and get things done.

Note: We will continue to update this article as needed. 

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What it Means   

If the Biden Administration is able to pass all these proposals through Congress and you make over $400,000 per year, you can expect to see the following:

• A decrease in your take-home pay in both Federal withholding and higher Social Security taxes.

• Reduced tax benefits for retirement contributions (i.e. smaller tax deduction)

You may also have to make some significant changes to your estate and legacy plan if the lifetime estate and gift tax exemption is reduced down to $3.5 million. Additionally, you and your heirs will need to plan around the potential tax consequences of the step-up in basis for taxable assets being eliminated.

If you make under $400,000 per year, you can expect the following:

• No change in your take-home pay

• No change in the tax benefits for retirement contributions.

• Refundable tax credits to help you cover healthcare costs and potentially even a public healthcare option you’ll have access to if not covered by a plan at work.

• A refundable first-time homebuyer credit you can take advantage of.

• Help with your student loan debt (if applicable). The Biden tax plan would provide some tax relief for student loans and add more generous forgiveness and payment-deferral rules for current student loan programs.

If you are a business owner with taxable income over $400,000, you’ll likely see a reduction in the qualified business income deduction you’ve been able to take the past few years. If your business is also taxed as an S-Corporation or C-Corporation, you’ll most likely see an increase in your corporate tax rate as well.

Ergo, now is a great time to schedule meetings with your financial advisor, your estate attorney, and your CPA to review your current financial, legal, and tax strategies to ensure they still match your needs in light of these many proposed tax rule changes. Protecting and growing your wealth  are able to maximize the tax saving opportunities available to you. 

Not sure where to start? We have established relationships with both estate attorneys and CPAs. We can help you manage your entire financial life as your personal CFO with our high-touch approach and expert advice. Schedule your FREE intro call today to see how we can help.

[1] Watson, Garrett, et al. “Details and Analysis of Biden’s Tax Plan.” Tax Foundation, Tax Foundation, 9 Nov. 2020, taxfoundation.org/joe-biden-tax-plan-2020/. 

[2] Scott, Michelle P. “Explaining Biden’s Tax Plan.” Investopedia, Investopedia, 9 Nov. 2020, www.investopedia.com/explaining-biden-s-tax-plan-5080766.

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Calton & Associates, Inc. does not provide legal or tax advice.