With the election of Joe Biden, Freeman Law has already begun to review what a Joe Biden presidency could mean to its clients. And although many of determinations could potentially depend on results from President Trump’s election challenges and a final tally of the United States Senate, Freeman Law wants our clients to be aware of the potential tax changes that could occur in the next few years under Joe Biden.
Increase in Top Marginal Tax Rate for High-Earners. Currently, the top federal tax rate is 37%. Mr. Biden has proposed increasing the top federal tax rate to 39.6% for those making more than $400,000 per tax year.
Investment Income. High-income taxpayers are currently taxed at approximately 23.8% on their net investment income, which includes capital gains and ordinary dividends. Mr. Biden has proposed maintaining these rates except for those taxpayers who make over $1 million. In these latter instances, Mr. Biden has proposed increasing the tax on net investment income to ordinary income tax rates of 39.6%.
Itemized Deductions. The 2017 Tax Cuts and Jobs Act limited state and local tax itemized deductions to $10,000. Mr. Biden has proposed capping itemized deductions to 28% and restoring the so-called PEASE limitation for incomes above $400,000. Mr. Biden also intends to eliminate the state and local tax cap of $10,000.
Employment Taxes. Currently, there is a payroll tax on worker’s wages up to $137,700 (for 2020, indexed for inflation). Payroll tax obligations are generally split 12.4% between employer and employee. Mr. Biden has indicated he would like to lift the payroll tax cap on high income earners making more than $400,000. Because employers are generally required to contribute half of payroll tax obligations, Mr. Biden’s proposal would likely mean an increased payroll tax obligation on employers for high-income earners.
Corporate Tax Rates. The corporate tax rate as of today is 21%. Mr. Biden has indicated he intends to increase the corporate tax rate to 28%.
Oil and Gas Production Incentives. The Internal Revenue Code provides various tax deductions and other incentives for certain oil and gas production activities. Mr. Biden has indicated he intends to end many of these incentives, including the deduction for drilling wells, depletion deduction for oil and gas, and domestic manufacturing.
Section 199A Deduction. Generally, certain taxpayers (excluding C corporations) are entitled to deduct 20% of their qualified business income (QBI) from certain flow-through activities, including partnerships, S corporations, or sole proprietorships (e.g., Schedule C activities). Mr. Biden has indicated he intends to limit this deduction.
GILTI Tax. Under current law, there is an effective tax rate of 10.5% on “global intangible low-taxed income” or GILTI of U.S. shareholders of controlled foreign corporations. Mr. Biden has indicated he intends to raise the GILT tax rate to 21%.
Estate and Gift Tax. Currently, there is an estate exemption of $11.58 million. In addition, assets that are transferred as part of death are eligible for a basis step-up to fair market value. Mr. Biden has proposed eliminating the stepped-up basis rules and reducing the estate exemption to $3.5 million. In addition, he has indicated he is in favor of increasing the estate tax.
Conclusion. As always, Freeman Law tax attorneys will continue to monitor developments in the federal tax laws. However, due to a potential change in the presidency (and particularly so if there is a change in the Senate), taxpayers would be wise to consult with tax professionals regarding whether they should initiate any tax planning techniques in light of recent events.
Freeman Law aggressively represents clients in tax litigation at both the state and federal levels. When the stakes are high, clients rely on our experience, knowledge, and talent to help them navigate all levels of the tax dispute lifecycle—from audits and examinations to the courtroom and all levels of appeals. Schedule a consultation or call (214) 984-3000 to discuss your tax needs.
