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As part of his campaign platform, Democratic Presidential nominee Joe Biden has released a tax plan that would significantly increase taxes on high net worth individuals. Although a campaign platform is only a “rough draft” that likely will never be fully implemented, it provides insight into the intended direction and changes that may be coming. Of course, it is Congress that writes tax and budget bills, and thus the House and Senate will have a determinative say. If Biden is elected, tax policy outcomes will heavily depend on whether the Democrats capture a majority in the Senate (and the size of the majority).
In general, the available information about these proposals is limited. It’s clear that the overall plan will include a number of complete or partial repeals of President Trump’s 2017 Tax Cuts and Jobs Act (TCJA).
It is also unknown when these proposals would take effect. It is commonly accepted that tax law changes passed late in 2021 can be expected to be retroactive to the beginning of calendar year 2021. Taxpayers looking to plan around these changes should consider acting before the end of calendar year 2020.
Below is a list of the main proposals affecting high net worth individuals:
Personal Income Tax Provisions:
- Tax long-term capital gain rates and qualified dividends at ordinary income rates for taxpayers with more than $1 million in taxable income (proposal would eliminate the long-standing 20% preferred rate for long-term capital gains and qualified dividends).
- Repeal TCJA’s tax cuts for taxpayers with income over $400,000. Taxpayers who are married filing jointly currently in the 35% and 37% brackets will see their rates increase to 39.6%.
- Reinstitute the “Pease Limitations” on itemized deductions for taxpayers with income over $400,000 and cap the value of itemized deductions at 28% of value. Under current law, itemized deductions are not subject to this limitation — deductions are valued at the taxpayer’s top marginal rate.
- Phase out the “Qualified Business Income” Section 199A deduction for taxpayers with income over $400,000. The QBI deduction is for taxpayers who report business income from pass-through entities such as LLCs and S-corporations on their personal returns.
- Eliminate tax deductibility for 401(k)/IRA contributions and replace the deduction with a credit equal to the amount of the contribution multiplied by a fixed percentage (this fixed percentage would be lower, perhaps significantly lower than the high income marginal rate).
- Eliminate stepped-up basis at death. It is unclear if this means that heirs will inherit the property at the decedent’s basis and potentially have large gains at a future sale or if death will trigger a taxable recognition event (potentially subject to the 39.6% rate).
- Eliminate or limit Section 1031 Like-Kind Exchanges and other benefits for real estate used in a trade or business.
Corporate Income Tax Provisions:
- Increase the top corporate tax rate to 28% (from the current 21%).
- Impose a 15% minimum tax on accounting profits for corporations with at least $100 million in revenue.
- Increase tax rates on profit of foreign subsidiaries of US companies.
Estate & Gift Tax:
Lower the $11.6 million gift and estate tax unified credit back to $5.8 million immediately (under current law, the exemption decreases to $5.8 million in 2026).
Payroll Tax:
Subject wages above $400,000 to the 6.2% Social Security payroll tax. Self-employment income would be subject to this tax as well (self-employment income over $400,000 would be subject to the 12.4% self-employment tax). This creates a “donut-hole” in how these taxes apply: individuals would subject to taxes on wages/self-employment from $0 to $137,700 and from $400,000 upwards.
