How the Biden Tax Proposals Might Impact You

Episode 5:  Louisville CPA Steve King discusses what 2021 could bring in terms of tax and fiscal policies by a new administration.  While none of this has been officially introduced, today’s discussion addresses what the Biden-Harris team proposed during its election campaign.  Steve explains what the implementation of some or all of the proposals could mean for you and your business.

Tax Rates and Deductions

The top bracket will increase from 37% to 39.6%.  During the campaign, candidate Biden has stated that no one making under $400,000 per year will see a tax increase.  At the same time, there is discussion of bringing back some limitations regarding certain deductions.

Capital Gains Increase

If you realize an increase on the sale of certain assets, you could be exposed to a capital gains tax.  This rate is typically lower than “ordinary” rates.  Currently this rate is between 15% and 20%.  The Biden proposal would eliminate the capital gains rate, if your income exceeds $1 million.  The gain would be subjected to a 39.6% rate.  Additionally, there are other taxes for Medicare and state, potentially yielding a combined tax rate of approximately 50%.

Limits to Itemized Deductions

If your income is over $400,000, and you’re itemizing, some of the deductions currently protected under the Pease limitation would be eliminated.

Estate Tax Changes

If your estate is more than $11.58 million, you could be subject to an estate tax (“death tax”).  The Biden proposal is to lower that threshold to $3.5 million per spouse.  This can be a significant factor for a family business or family farm. 

One option for someone who’s concerned about the estate tax may be to consider setting up a Spousal Lifetime Access Trust (SLAT).  The trust would own the assets, but it removes them from the estate, thus reducing tax exposure.  Your spouse would still have access.  There are many options and some may have income considerations.  You should always consult your CPA when making this type of decision.

Elimination of the Step-Up in Basis

This is related to the estate tax.  Assume you purchase stock and it appreciates in value.  Upon your death, the asset becomes part of your Estate.  Your Will or other arrangement passes ownership of that stock to an heir(s).  Currently, they receive a step-up in the basis.  The asset passes to them at the current level, not at the level it was when you originally purchased it.  This can have a dramatic impact on any capital gains your heirs may incur, should they decide to sell some or all of the shares. 

The Biden proposal is to eliminate the step-up protection.  The step up applies to any capital gain asset, not just stock.

One income tax mistake people often make is gifting appreciated stock to your kids, while you are still alive.  If you were to do so, they get your basis from a capital gains standpoint.  It would be better to allow them to inherit the stock, assuming the step-up in basis rule were still valid.

Child Tax Credits

The Biden proposal is to expand and increase the child tax credit for a period of years and then reduce them to lower levels.  Joe Biden also proposed a $5,000 tax credit for care-givers of individuals with specific needs (e.g. a special needs child who is older than 18 years of age).

Elimination of Carried Interest

It’s not a new proposal, but it’s back.  This proposal would impact some people who work in private equity and hedge funds. This would impact how those individuals report income vs. capital gains. 

Payroll Tax Increase

If your pay is above $400,000, the Biden campaign has proposed increase your payroll tax.  It could actually double.  This could also hit the employer’s side as well.

Corporate Tax Rate Increase

The Biden campaign is proposing raising the corporate tax rate from the current 21% to 28%.  In previous years, the rate was 35%. 

QBI Phase Out

To help small businesses (e.g. LLCs, S-Corps, Partnerships, etc.), the Tax Cut and Jobs Act of 2017 created a pass-through deduction (Qualified Business Income).  Currently there is an elimination of 20% of net profit for tax purposes.  It’s basically a deduction.  If your income goes over $400,000, the QBI would phase out under the Biden proposal.

Certain service industries are already subject to phase-outs at lower levels.  So far, it hasn’t been determined how this QBI phase out would impact these service industries (including financial service professionals, accountants, physicians and many other job types). 

Advice to Business Owners and Individuals

This isn’t the first time we’ve gone into a new year with a lot of unknown variables.  While it complicates your planning, there are steps you can take.

• Start with having good information about your current situation.
• Be flexible. Have a plan, but remember to have contingency plans ready.

QuickBooks is a very good accounting software.  Steve King and his business partner, Victor Meyerowitz, are both QuickBooks advisors.  Having the ability to generated clear and efficient reports can help you to make better decisions and pivot more quickly.  This might be the time for you to implement a good accounting software, if you haven’t already done so.

Thank you for taking the time to listen to this episode.  For more information, contact Steve King, Partner at MK CPAs and Advisors, at 502-587-9833.  They’re here to help you to Make the Numbers Work.