How Will Election Results Impact Tax Outlook for 2021 and Beyond?

Joe Biden’s election as president could mean a wide array of tax changes for higher-income individuals and businesses. The Biden administration’s ability to push through tax changes will depend on Congress, and with Democrats poised to take the majority in the Senate, at least some changes seem inevitable.

The good news on any potential changes is that many experts believe the federal government will be too occupied with COVID-19 and economic challenges to tackle the tax code this year. In addition, President-elect Biden and other Democrats have indicated that any tax code changes they implement will likely take effect in 2022 or after (rather than being retroactive to 2021).

Regardless of the timing, be proactive about speaking with your tax advisor about any potential shifts in tax policy that might impact your future tax planning.

With Congressional support, Biden will likely try to move forward with at least some of his tax proposals. Proposals in Biden’s tax plan that may increase tax liability apply only to taxpayers with income over $400,000, and several kick in only for income over $1 million.

So far, Biden’s proposals include few details of how they would be implemented; in some cases, it’s not clear if his preferred thresholds for tax increases on income over $400,000 and $1 million refers to adjusted gross income (AGI) or taxable income and if the same limits would apply to individuals and married filing joint filers.

Here’s a quick rundown of the potential tax changes you should be aware of.

Tax changes for individuals

Biden’s proposed tax code changes for individuals include:

• Raising the top income tax rate to 39.6% from 37%
• Raising the long-term capital gains and qualified dividend tax rate to 39.6% for taxpayers with income over $1 million
• Phasing out the 20% deduction for qualified business income (QBI) for taxpayers with income in excess of $400,000
• Several changes to itemized deductions:
  • Capping itemized deductions for those with income over $400,000
  • Reinstating the Pease Limitation, eliminated by the Tax Cuts and Jobs Act (TCJA), and reducing a taxpayer’s total allowable itemized deductions by 3% for every dollar of AGI over a certain threshold
  • Eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes
• Having the 12.4% Social Security tax, shared by employers and employees, kick back in for wages over $400,000 (it currently only applies to wages up to $142,800)
• Estate and gift tax changes, including:
  • Reducing the exemption for estate and gift tax transfers from the current combined lifetime $11.58 million exemption to around $5 million in estate inheritance and $1 million in lifetime gifts
  • Raising the estate tax rate to 45% from 40%
  • Eliminating the step-up in basis that allows heirs to establish the basis value of assets they inherit as the value of those assets at the original owner’s death
  • Taxing the unrealized appreciation of an individual’s assets upon death
• Limiting like-kind exchanges used to defer taxation on sale of real property
• Expanding access to ABLE accounts, the tax-advantaged savings accounts that people with disabilities can use to pay for qualified disability-related expenses
• Expanding the child tax credit to qualifying expenses up to $3,600 per child
• Expanding the child and dependent care credit to qualifying expenses up to $8,000 per child and $16,000 per family
• Adding a $5,000 tax credit for those who act as caregivers to the elderly

Tax changes for businesses

Biden’s proposed tax code changes for businesses include:

• Raising the corporate tax rate to 28% from 21% (before 2017’s Tax Cuts and Jobs Act, it was 35%)
• Implementing a 15% “alternative minimum tax” for corporations with book income above $100 million
• Increasing the global intangible low tax income (GILTI) rate on foreign profits to 21% from 10.5%
• Repealing the temporary expansion of net operating loss (NOL) deductions that was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
• Eliminating deductions for expenses associated with moving jobs out of the U.S.
• Forcing companies to return public investments or tax benefits when they move U.S. jobs overseas
• Enacting a 10% surtax on businesses that move jobs and manufacturing overseas and then sell goods or services to U.S. consumers
• Expanding tax breaks and access to 401(k) plans and creating tax credits for small businesses that offer retirement plans for employees
• Adding tax credits for employers that hire a person with a disability or make their workplaces more accessible
• Expanding tax credits for energy-efficient buildings and homes
• Adding tax credits for renovating and modernizing existing or recently closed manufacturing facilities
• Granting a 10% “Made in America” tax credit
• Changing some Opportunity Zone program provisions:
  • Adding incentives for qualified opportunity funds (QOFs) to partner with community organizations to create specific positive financial impacts on households in an Opportunity Zone
  • Requiring more detailed reporting and disclosure of QOF impacts on local residents
  • Providing certain tax breaks only for projects that are providing economic, social, or environmental benefits

What might these potential changes mean for you?

Although it’s possible changes could affect 2021 taxes, it’s mostly likely that tax code changes – if any – will go into effect for the 2022 tax year or after. So, take this year to plan for those changes. If your AGI is over $400,000; you expect it might be over that threshold in 2022; or you have significantly appreciated property (including a business, securities or real estate) that you’re considering selling, talk with your tax professional about any planning you should do now.

As you plan for the next couple of tax years, particularly consider whether you should:

• Accelerate income into 2021 to avoid potentially higher tax rates in 2022 and beyond
• Accelerate certain itemized deductions into 2021 to avoid having these deductions getting limited or disallowed later on
• Review your estate and gift tax planning
• Trigger the recognition of capital gains in 2021 rather than defer them into a year where the capital gains rate is expected to be higher
• Take into consideration the possible changes to the corporate and individual tax policies when modeling potential C-Corp or S-Corp conversions.

There is still a fair amount of uncertainty about what kinds of tax changes may be passed under a Biden administration. Contact your Kaufman Rossin tax professional today to discuss the potential implications, explore how different scenarios might impact your tax situation, and plan for your financial future.