December 8, 2020
When President-Elect Biden takes office in January, he will inherit a battered economy, historical national debt, and the ongoing public health crisis from COVID-19. He campaigned on promises to raise taxes for corporations and wealthy Americans and reinstate or expand tax credits and incentives for lower- and middle-income earners. But campaign promises and future reality are often two different scenarios. With 2021 right around the corner, many Atlanta taxpayers are wondering what changes they can expect to individual income taxes after Inauguration day. Important insights into the potential changes can be gleaned from the President-Elect’s proposed changes for individual income taxes. While it is not likely these will be passed by Congress without some modifications prior to 2022, it does provide important insights to consider. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key information below.
For Biden, the most frequently talked about number has been $400,000. This is the threshold that would separate the largest tax increases from more moderate proposals. He has supported reinstating the top tax rate for Americans making more than $400,000 per year to 39.6 percent, the pre-Tax Cuts and Jobs Act rate.
In 2020, the top tax rate is 37 percent for income above $501,401 or $622,050 (single and married filing jointly, respectively). Americans making $400,000 this year may fall in either the 32, 35, or 37 percent tax brackets, depending on how they file. If existing tax brackets remain unchanged in 2021, adjusted taxable income ranges would only increase for inflation.
It appears that $400,000 is also the point at which the Social Security tax would be reinstated if Biden’s proposal goes through. Currently, the 12.4 percent payroll tax (half paid for by the employer and half by the employee) stops at $137,400 in wages. Under Biden’s plan, wages between $137,400 and $400,000 would not be subject to the Social Security tax.
Taxpayers earning more than $400,000 may also face a cap on itemized deductions. The proposal calls for limiting the value of itemized deductions to 28 percent of taxable income, as well as, restoring the Pease limitation. The Pease limitation reduces the value of itemized deductions for high-income earners and was repealed in the Tax Cuts and Jobs Act.
It is estimated that 80 percent of Biden’s proposed tax increases would be absorbed by the top one percent wealthiest taxpayers. Taxpayers earning less than $400,000 per year will not see the same kind of direct tax increases but could still see an average of 0.9 percent less after-tax income due to lower investment returns and other indirect taxes, according to some analysts.
Current federal estate tax exemptions create a favorable environment for many wealthy Americans. The 2020 estate tax exemption amounts are $11.58 million per person and $23.16 million for married couples. Biden has expressed a desire to lower the federal estate tax exemption to 2009 levels when the federal exemption was just $3.5 million and the top tax rate on estates was 45 percent. Additionally, Biden has proposed eliminating the step-up in basis for capital gains. Essentially, this move would value inherited assets at the time they are sold rather than when the decedent originally acquired them.
Many consider the extent of the proposed estate tax changes to be rather extreme, and especially in a divided Congress, it is less likely that estate taxes would undergo such changes. However, taxpayers earning more than $1 million and whose estate values exceed $3.5 million should be evaluating their long-term wealth and estate planning strategies now.
Long-term capital gains are currently taxed at a top rate of 20 percent. This does not include the Net Investment Income (NII) tax, which is 3.8 percent and levied on income above $250,000 for joint filers ($125,000 for single filers). For some this favorable treatment may not last. For those earning more than $1 million per year, Biden has called for increasing the tax on long-term capital gains and qualified dividends to the top ordinary tax rate of 39.6 percent (plus NII). There are already different rules for different types of appreciated assets and taxpayers should always consult with their advisor prior to selling.
Much of the plan relies on increasing taxes for wealthy Americans and corporations to provide benefits elsewhere. Low- and middle-income taxpayers could see a variety of new, reinstated, or expanded tax credits and incentives. These include:
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It is clear the new Administration’s tax plan will increase taxes on high-net-worth individuals while presenting new saving opportunities to lower-income taxpayers. Although not set-in-stone, the changes provide insight into what changes may be forthcoming in 2022 and beyond. For this reason, it is important to carefully review planning opportunities in 2020 and beyond. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.
Disclaimer – It is important to note Wilson Lewis is not expressing a position about the proposed changes rather is sharing the available details to keep clients, prospects and others updated on relevant tax issues.