Potential Tax Changes from Biden Administration
By John Owens, CFP®, EA, ECA
A new administration coupled with total democratic control of Congress means we’re ripe for tax changes. But what the texture of those changes actually looks like may vary, will likely be incremental, and it all hinges on the recovery of our economy from the pandemic.
We’ll first talk about what Biden’s campaign proposals looked like, and then give you our crystal ball on what we think may happen.
Income Tax Rates
Biden has pledged not to raise taxes on those earning $400,000 or less. For those currently in the top tax bracket - 37%, he proposes raising that to the pre-2018 level of 39.6%, and also taxing capital gains at 39.6% for those with $1M or more in income.
BKFI Take: This is going to impact our high earning tech clients with equity compensation. We will be scenario planning with you to see if adjustments should be made, especially when it comes to exercising and holding Incentive Stock Options.
Tax Credits
The Biden proposal also includes a few adjustments to current credits and deductions. In particular, his plan would increase the credit for child care expenses to $8,000 for one child or $16,000 for families with 2 or more children, with phaseouts starting at $125,000 in income for families.
BKFI Take: This is fantastic for families. The phaseouts are similar to what we’ve seen before.
Itemized Deductions
The plan would remove the $10,000 cap on state and local tax (SALT) deductions - a provision of the 2017 tax cut that adversely impacted many NY and CA taxpayers.
BKFI Take: This is HUGE. A lot of our clients missed out on major deductions for the taxes paid in high tax states like New York and California.
Student Loans
The plan offers tax-free student loan cancellation after 20-years of income based repayment.
BKFI Take: A massive win for those with student loan debt and modest salaries.
Payroll Taxes + Employers
Biden’s plan creates a Social Security donut-hole of sorts. Taxpayers will pay into the system up to the wage base - approximately their first $140,000 of wage income - then pay nothing until they eclipse $400,000 in income. They also plan to crack down on employers classifying employees as independent contractors to avoid Social Security taxes.
BKFI Take: This is a win for folks being forced into 1099 roles when they should truly be employees. High earning tech clients - prepare to pay 6.2% more in tax on your options + RSUs. Grandma/Grandpa - you get to stay retired.
Retirement Plans
This is different from what we’ve seen previously. The Biden plan aims to levelize the benefit provided for retirement plan savings via a tax credit and offer more incentives for small businesses to offer retirement plans.
BKFI Take: We’ll look more closely at Roth savings options if this becomes law. In a practical sense, it would be a very big change!
Small Businesses
Eliminate the QBI deduction for real estate investors and only offer it to taxpayers earning less than $400,000 per year.
BKFI Take: Run a manufacturing business? Construction? Invest heavily in Real Estate? The special QBI deduction you get is on the chopping block for high earners.
Home Ownership
Provide a refundable, advance tax credit for first-time homeowners to assist with their purchase of up to $15,000.
BKFI Take: Big deal - should have a positive effect on middle-income earners and make home ownership more accessible!
Estate Taxes
Eliminate the step-up in basis at death that allows for tax-free transfer of assets at death to heirs. There may also be movement on lowering the estate tax threshold from its current level of ~$22M for married couples.
BKFI Take: We’ll be talking about Estate planning a lot more. And are happy to help family members as this is often a multi-generational conversation.
Other Key Provisions
Raise the Corporate Income Tax to 28% (currently 21%)
Consider implementing a tax on financial transactions
Increased tax credits for electric vehicles
End tax subsidies for fossil fuels
A Crystal Ball
As you can see, the Biden campaign’s tax proposal was broad and ambitious - it would mark a significant change in our tax code. But that’s not likely to happen overnight. The US Senate is evenly divided and the filibuster remains intact - meaning most legislation requires 10 GOP senators on board to get to a vote. However, revenue and budget related bills can pass on a simple majority vote using the reconciliation process, meaning that Biden could, in theory, pass tax hikes with only Democratic Senators and and Vice President Harris breaking the tie.
In reality, it’s hard to raise taxes during an economic downturn - so let’s watch for them to go after low-hanging fruit first:
Lowering the estate tax threshold from over $11M
Raising capital gains rates on income over $1M
Taxing big corporations more on their book income even when they don’t show a profit.
These items are likely the most politically palpable and can probably get done rather quickly. And, if part of a standalone bill, they set Republican’s up for a tough vote ahead of the midterms - as this really only raises taxes on big corporations or very, very wealthy individuals + high earners.
On the other side of the coin, Biden’s plan also has some stimulative provisions that could help working families that also are quite politically palpable:
Increasing the dependent care tax credit
Addressing student loans in a more permanent way
Both of these issues are top of mind for a post-COVID economy where folks are back to work in offices, kids are in daycare or after-school care, and student loan payments are required to pick up again.
Then, in 2022, assuming we’ve seen some significant movement in the economic recovery, look for corporate tax rates to increase and ordinary income tax rates on those earning more than $400k per year to potentially see some hikes. Again, this is a crystal ball - who knows what Congress will take up and when.
Planning
We’re cognizant that the tax landscape will likely get less favorable for our tech professional clients with high incomes and equity compensation in the coming years - making planning all the more important.
On our radar is planning for Incentive Stock Options. We often exercise and hold them for a year to qualify for long-term gain treatment. If the top capital gains rate increases to 39.6%, this strategy will need to be reviewed.
We’re also mindful that taxable estate planning could become a more more prevalent component of financial plans. Today, most of our estate conversations are about efficiently transferring assets. Under the proposed changes, that conversation may pivot more towards estate tax minimization.
We’re only in the early days of this administration - so there’s a lot of unknowns, the one thing we do know is that we’ll be here every step of the way as proposals and campaign promises go though the sausage-making process that is legislation.