One question that many taxpayers are asking is 'how will the election results affect my tax planning?" It is obvious there will be some drastic changes, so getting prepared now is a wise decision. Changes most likely won't affect you this year, but certainly, starting with reporting for 2022, you can expect to see a difference. President Biden's plan includes implementing important legislation that will need to be financed by 'fair share' tax increases. Additionally, the pandemic's economic impact is a future bill that will have to be paid by taxpayers. Of course, Biden's plan must be voted on and approved by the Senate and the House.
Individual and Business Income Tax
Under the new Presidency, individual and business income taxes and deductions will be affected. This is mostly applicable to those with taxable income over $400,000, but there are some exceptions.
- There are currently seven levels that start at 10% up to 37% under individual tax rates, depending on income. The proposed tax change will increase the top income levels, typically $400,000 and up, to pay a rate of 39.6%.
- As far as filing taxes, individuals may encounter some transition in the way itemized deductions are handled. Under current tax law, a taxpayer can choose from the standard deduction of $12,550 for single taxpayers and $25,100 for married taxpayers filing jointly OR itemized deductions with no cap or Pease Limitation, whichever is higher. With new tax reform, Biden intends to limit itemized tax deductions to 28% for taxpayers with income over $400,000. The state and local tax (SALT) payments are capped at $10,000 but would change to no limits.
- C Corp businesses should expect to see an increase in corporate tax rates from 21% to 28%. Up until now, there has been no alternative minimum tax (AMT), but Biden is pressing to move that to 15% for companies with more than $100 million in income.
- Businesses that are partnerships, S corporations, or sole proprietorships, under the previous Trump administration were allowed 20% qualified business income deductions and 20% of qualified REIT dividends and some publicly traded partnership income. This will be altered to change the phase-out for those with income over $400,000. Additionally, special qualifying rules will be eliminated.
- The global intangible low-taxed income or GILTI will be raised from 10.5% to 21% if Biden gets approved. He also wants to do away with the exemption for returns under 10% qualified business asset investment (QBAI).
- The employment and social security tax cap for those earning over $400,000 will be removed if Biden gets approval.
President Biden's list of new or improved tax credits is extensive. This list includes:
- An expansion of Earned Income Credit
- Increasing child tax credits
- Boosting child and dependent care tax credits
- Reinstating the First-Time Homebuyers’ Tax Credit
- Reductions in tax liabilities for companies that are affected by layoffs or government closures
- Tax credits for small businesses that start retirement savings plans for employees
- A "Made in America" tax credit
- A raise in the Affordable Care Act's tax credit
- Allow for a refundable tax credit for landlords that cap rent and utilities at 30% of the renter's monthly income
- An increase in the Low Income Tax Credit
- Additionally, Biden's tax proposal changes include differences in retirement account contributions and an expansion of tax credits related to renewable energy.
Tax Changes Related to Estates, Trusts, and Gifts
Current estate and gift tax exclusions are at $10 million for individuals and $20 million for couples with increased inflation amounts. The President wants the exemptions to be based on a per individual taxpayer basis at $3.5 million state tax exemption with a lifetime cap of $1 million exemption on gifts. Additionally, POTUS wants to increase tax rates for estates and gifts from 40% to 45%.
Capital Gains and Qualified Dividend Income
Long-term capital gains are traditionally taxed at intervals of 0%,15%, or 20% based on the earner's income tax bracket. Additionally, there is a net investment income tax of 3.8%. With the introduction of tax changes, investors could see an increase to 39.6% for taxpayers in the $1 million+ tax bracket plus the 3.8% net investment income tax.
We Can Help You Navigate Change
Although this certainly isn't an exhaustive list of possible and probable revisions and additions, obviously, changes are coming, and tax planning is more important than ever before. At Chandler and Knowles, we want to keep you informed about maximizing your tax situation while making certain all the rules are followed. Contact us today to meet and discuss your situation for better clarity and assistance