12 Tax Changes Joe Biden May Make If He Wins The Election


Nearly all polls suggest Biden will beat Trump, changes to the corporate tax rate, GILTI, and basis are likely to follow

Biden's tax plan designed to raise between $3.3 trillion and $3.7 trillion in additional federal tax revenue over the next decade may have the following changes to our current system.

1. An increase in the corporate tax rate

Under the Tax Cuts and Jobs Act (TCJA), the peak marginal corporate tax rate was slashed from 35% to 21%. Reports suggest Biden would increase it to 28%. Increasing the corporate tax rate to 28% should be responsible for raising roughly a third of the $3.3 trillion to $3.7 trillion.

2. A minimum tax on corporate income

Biden's tax plan calls for a minimum tax of 15% on companies with $100 million or more. Call this the Amazon rule, after Amazon paid $0 on a reported $11.2 billion in profits those on the hill are anxious to close the loop holes that allowed it.

3. Double the GILTI tax rate on foreign subsidiaries

Biden's tax plan would also double the tax rate on Global Intangible Low-Tax Income (GILTI) earned by foreign subsidiaries of U.S. companies. Currently 10.5%, the GILTI tax rate would increase to 21%.

4. The imposition of a financial risk fee on large banks

Biden is calling for the introduction of a financial risk fee on large banks (i.e., those with over $50 billion in assets). It would provide the Federal Deposit Insurance Corporation (FDIC) a pool of funds to use when conducting the orderly liquidation of a failed financial institution.

5. An increase of the marginal tax rate for top earners

Biden would like to raise the top marginal income-tax bracket from 37% to 39.6%. (In the 2020 tax year, this top rate applies to earned income above $518,400 for single filers and over $622,050 for married couples filing jointly.

6. Reinstitute the payroll tax on the top 1%

In 2020, all earned income (wages and salary, but not investment income) between $0.01 and $137,700 is subject to the 12.4% payroll tax that funds Social Security. Approximately 94% of workers will pay into Social Security this year with every dollar they earn. Comparatively, the other 6% of workers who'll make more than $137,700 in 2020 will see their income above $137,700 exempted from Social Security's payroll tax.

Under the Biden tax plan, individuals earning between $137,700 and $400,000 would still be expemt between those amounts , but any income above $400,000 would be taxed at the 12.4% payroll tax. This would raise between $797 billion and $1.04 trillion over the next decade.

7. Lift the capital gains tax on filers with incomes above $1 million

At the moment, short-term capital gains (assets held for 365 or fewer days) are taxed at the ordinary income tax rate, whereas long-term gains are taxed at 0%, 15%, or 20% (single and married couples filing jointly with earned income above $441,450 and $496,600). Also the Net Investment Income Tax (NIIT) applies a 3.8% surtax to capital gains for persons and couples with over $200,000 and $250,000, respectively, in income.

Biden's proposal calls for filers with over $1 million in income to pay ordinary tax rates on their gains, no matter how long they've held an asset. This would imply 39.6%, plus the NIIT, for a total tax rate of over 43%.

8. Eliminate the stepped-up basis

Step-up basis refers to the cost basis of assets or property transferrable to an heir upon death. If, as an example, an individual purchased a home for $300,000, but it was worth $600,000 at the time of their death, their heir would pay capital gains on anything over $600,000 if the home was ever sold.

Under Biden's plan heirs would not "inherit" a stepped-up cost basis and would have to pay on all the gains from the original price.

9. Limit itemized deductions

Biden's plan also calls for is a cap on itemized deductions of 28%.

10. Phase out small business income deductions over $400,000

Biden also wants to see small business income deductions over $400,000 phased out. Currently, qualified pass-through business deductions, which allows small business owners to deduct up to 20% of their business income under the TCJA, are capped at $163,300 for single filers and $326,600 for joint filers in 2020. For everything above this amount rules exist that determine whether or not you're allowed to take qualified business income (QBI) deductions.

Biden plans to keeping QBI deductions in place for those with less than $400,000 in earnings, but not allow these deductions for those with over $400,000 in earnings.

11. Institute first-time homebuyers' and renters' tax credits

Biden has talked up the idea of providing new homebuyers with a tax credit worth up to $15,000. Being called the First Down Payment Tax Credit. Additionally, Biden wants to provide Section 8 housing vouchers to eligible families so they won't have to spend more than 30% of their income on rent.

12. Up the existing Child and Dependent Care Tax Credit

Currently, parents of children under the age of 13 or those who take care of a disabled dependent living in their household are eligible for a credit based on their expenses to care for a child or disabled dependent. This credit is equal to 35% of up to $3,000 in qualified expenses for one dependent or $6,000 for two or more dependents. This effectively means this tax is worth up to $2,100 under the TCJA.

With Biden's plan, maximum allowable expenses would soar to $8,000 for individuals and $16,000 for multiple dependents, with the reimbursement percentage being adjusted to 50%.

Whether or not this plan will be implemented or which parts will be will depend on the make up of the Congress and the Senate after the election. But either way, it's important to understand how a possible Joe Biden presidency could affect your wallet.

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Economics, Finance and Investing