Potential Tax Policy Changes under the New Administration
The election of Joe Biden as President coupled with Democratic control of the U.S House of Representatives and U.S. Senate could mean tax changes are on the horizon. Although control does rest with the Democratic party, control is only by the slimmest of margins. Any changes to tax policy likely will be only modest as drastic changes will not pass muster with some of the more moderate Democrats. With the country still in the midst of its fight to control COVID-19, it is likely that changes to tax policy will not be considered at least until 2022. What follows is what I believe some of those changes might look like.
Individual Income Tax Changes
- Income tax brackets – Presently, the highest marginal income tax rate is 37%. Before the Tax Cut and Jobs Act of 2017, the highest marginal income tax rate was 39.6%. President Biden has expressed interest is raising the current top rate back to 39.6%. It is also possible that he will compress the income tax brackets so that you reach higher marginal income tax rates sooner.
- State and local tax deduction – Under current law, your deduction for real estate taxes, personal property taxes and state and local income taxes is capped at $10,000. This limit hurts property owners who own high value homes and those individuals who reside in high income tax states such as New York or California. Under a Biden presidency, this limit is likely to be removed.
- Capital gains – For single taxpayers earning $200,000 or more and taxpayers filing jointly who earn more than $400,000, President Biden has proposed raising the capital gain tax rate from 15% to 20%. He has also proposed eliminating capital gain treatment on capital gains generated by those taxpayers earning more than $1,000,000. These individuals would have their capital gains taxed at ordinary income tax rates.
- Social Security tax – Earned income up to $142,800 is presently subject to Social Security tax. President Biden is considering reinstating that tax once income reaches a certain level. The number I have heard most often is $400,000.
Gift and Estate Tax Changes
- Basic exclusion amount – Every individual is entitled to an $11,700,000 basic exclusion amount. This means that every person can transfer both during life and at death up to $11,700,000 of property gift and estate tax-free. A married couple can transfer twice that amount. As a result of this exclusion amount, few people are subject to either gift or estate tax at the federal level. President Biden has mentioned on several occasions that he would support reducing the exclusion amount to some lower amount like $3,500,000 per individual.
- Cost basis step-up – President Biden has talked about eliminating the step-up in cost basis that a beneficiary receives upon inheriting certain property at death. This rule works as follows: If I purchase a stock for $5,000 and five years later pass away when the stock is worth $15,000, the person inheriting that stock from me receives a step-up in cost basis to $15,000 – the value of the stock at the time of my death. This affords the beneficiary the ability to sell that stock at my death or shortly thereafter and pay little or no capital gain tax on the sale. If this rule is eliminated, the person inheriting the stock from me would receive a $5,000 cost basis – the amount I originally paid for the stock.
While nobody has a crystal ball and can predict with certainty what the future holds for tax policy changes under a new administration, the items mentioned above bear watching in the near future. As always, if you have any questions about anything mentioned here or if I can be of assistance in any way, do not hesitate to contact me.