Last week’s Senate election results in Georgia give President-elect Joe Biden a much better chance at implementing the policies that he promised on the 2020 campaign trail, such as raising taxes on corporations, estates and high-income households. Even with the backing of a democratic controlled senate, however, Biden will still face challenges turning his proposals into law given the narrow legislative margins and the ongoing pandemic. However, unlike other policy areas, tax changes can pass with a simple majority of senators, instead of the 60-vote majority often needed for most other legislation.
What can we expect to see?
Instead of the $3 trillion in tax increases Biden sought during the campaign, U.S. citizens are more likely to see closer to $2 trillion worth of tax increases over the next decade, resulting in a significant bump in federal revenue to pay for new programs and targeted tax cuts. We would like to highlight a recent Wall Street Journal article by author Richard Rubin, titled “Biden Tax-Increase Agenda Revived as Democrats Win Senate,” which outlines some of the most significant tax changes and plans for economic recovery the president-elect is hoping to implement once inaugurated. We have included a concise breakdown of these plans below:
- Stimulus checks
- Senator Chuck Schumer (D., N.Y.) has stated that the Democratic party intends to authorize the $2,000 stimulus payments that were blocked late last year.
- Corporate tax rate
- Biden proposes raising the corporate tax rate from 21% to 28%, imposing a minimum tax on companies with lower effective tax rates and increasing taxes on U.S. companies’ foreign earnings.
- Income tax rate
- Biden plans to raise the income tax rate for households making more than $400,000 from 37% to 39.6%, while also limiting deductions and raising payroll taxes for that group.
- Capital-gains taxes
- For Americans with incomes of $1 million or greater, Biden intends to implement a top long-term capital gains tax rate of 39.6% (the same top tax rate proposed for ordinary income). Factoring in the 3.8% surtax for net investment income, that means the long-term capital gains rate could reach 43.4% for top earners in the U.S.
- Estate Taxes
- Biden’s plan proposes the elimination of basis step-ups for inherited assets. Under current law, the cost basis of an asset transferred posthumously is modified to its value at the date of the decedent’s death. This is what is referred to as a “step-up in basis”. Biden also proposes that lifetime exemptions return to year 2009 levels which were $3.5 million for estates and $1 million for gifts, with an increased maximum tax rate of 45%.
- Tax credits
- Biden is calling for expanding the child tax credit to from $2,000 to $3,000, adding $600 for young children and making those payments monthly instead of once a year in tax refunds.
- Biden is also proposing tax credits for caregivers, renters and first-time home buyers.
- State and local tax deductions
- Democrats representing high-tax states are considering repealing the $10,000 limit on state and local tax deductions, ultimately cutting some taxes for high-income constituents.
For further details, subscribers to the Wall Street Journal can read the full article here. There is still much to be determined about how these potential changes will transpire and when. Rest assured, we are paying close attention. If you would like to discuss how President-elect Joe Biden’s tax plans may affect your unique financial situation, please feel free to reach out to a member of the Maddox Thomson team today. We are here as a resource to help you navigate through all the tax-related changes sure to come in 2021.