November is approaching and in an election year it means candidates are making plans and promises. These promises and plans inevitably involve something about taxes; and when it comes to taxes, it pays to be prepared. Although we do not take a position on the candidates or proposals, it is important to consider the potential impact of the elections in case you consider the timing of your tax decisions for the balance of the year and 2021. The following points explain the current status of various tax proposals that may affect your planning.
As a suspected Democratic Party candidate, former Vice President Joe Biden’s tax proposals deserve attention, and this post focuses on those proposals. At this stage of the choice, most of these suggestions are healthy bites with few, if any, details washed out. However, if waived, they could have a significant impact on tax planning.
Biden’s proposals focus on the stated goals of making tax legislation more progressive and fairer and reducing the barriers for families to qualify for tax breaks.
Key elements of Biden’s tax proposals for individual taxpayers include:
- An increase in the highest tax bracket of individuals from the current 37% back on 39.6% (the maximum rate under the 2017 Tax Cut and Jobs Act) for taxable income over $ 400,000.
- An increase in the tax rate for long-term capital gains and dividends of 20% 39.6% (almost twice as much!) for revenues over $ 1,000,000.
- Elimination of the base elevation upon death of inherited property.
- Rise in social security taxes for high earners by introducing social security taxes on incomes over $ 400,000. Currently, social security taxes of 12.4% on income are maximum when income reaches $ 137,700. The proposed increase would create a “donut hole” for revenue between the current maximum of $ 137,700 and $ 400,000. Income in this area would not be subject to social security tax. An additional Social Security tax of 12.4% (with the employer paying the 6.2% of that tax) would be payable on any income above $ 400,000.
- Restore the Tax Reduction and Pre-Tax Jobs Act restriction on individual deductions for taxable income over $ 400,000. This limit limited the amount of individual deductions that a taxpayer with income above a certain threshold could receive for donations such as charity. At the same time, the fact that the limitation on state and local taxes was waived was lifted.
With a potential increase in the highest tax bracket for those earning more than $ 400,000 and an increase in capital gain and dividend rates for individuals (with incomes greater than $ 1,000,000), taxpayers who are earning income or profits in the near future want Companies may want to consider paying dividends in 2020 rather than later, and employers may want to consider paying year-end bonuses to their high-income employees in 2020 rather than waiting until after the New Year.
Legislators have often proposed removing the death base increase to increase revenue, but never put it into effect. Given the unpopularity of the proposal, it is unlikely to be adopted unless it is significantly changed, for example by creating a high income threshold below which the base would still be allowed to increase. Eliminating the base increase would introduce a number of complications, including because a significant portion of family tax planning relies on the base increase rule. Additionally, in many cases, it will be difficult to determine the historical tax base for real estate that the deceased acquired years ago. Such a change in the law would likely result in significant changes in tax planning as individuals tend to keep property until death, allowing their families to sell the property with no taxable profit.
Key elements of Biden’s corporate tax proposals include:::
- An increase in the corporate tax rate 28% (up from 21% since 2018, but still lower than 2017).
- Establish a minimum tax for companies with book profits of $ 100 million or more.
- Removal of the 20% corporate deduction available since the Tax Reductions and Employment Act 2017 under Section 199A for companies not subject to corporate-level tax (e.g. sole proprietorships, partnerships, S companies and real estate investment funds). The Section 199A 20% deduction is currently available for income from a skilled trade or company (subject to a number of restrictions, including in some cases the amount of wages paid by the company). The 20% deduction should relieve non-corporate businesses, similar to the 2017 corporate tax rate cut from 35% to 21%.
- Increase the Tax on Low Intangible Tax Income (“GILTI”) from 10.5% on the non-repatriated low tax income (above a certain threshold) of US corporate foreign subs to 21%.
- Established a manufacturing group tax credit to reduce the tax liability of companies affected by layoffs or the closure of a large government facility. While the details are unclear, this may include a tax credit for companies renovating or upgrading existing or recently closed manufacturing facilities.
- The expansion and permanent tax credit for new markets. The New Market Tax Credit offers a tax credit to stock investors in certain low-income communities.
- Providing small business tax credits to introduce retirement plans.
- The expansion of multiple tax credits and deductions related to renewable energy
- End fossil fuel subsidies.
In anticipation of a corporate tax rate hike, companies may want to consider ways to accelerate income years ahead of a possible tax hike. Business sellers will have an incentive to complete transactions before 2021 and may want to rethink income deferral transactions. Partnerships, sole proprietorships, suburban companies, and real estate mutual funds that have received Section 199A’s 20% deductions should consider ways to avail of these deductions while they are still available. The expansion of the new market tax credits and renewable energy credits will be a boon to companies operating in these markets. An increase in the GILTI tax can reduce the incentive for companies with foreign subsidiaries to operate in low-tax areas, even though the GILTI rules have already been criticized for punishing activities that are not abusive.
Much has to happen, of course, before any of these proposals can be adopted (a choice to be won to get started) and it is extremely unlikely that any of these changes will be made retrospectively to a year prior to the year of entry into force. It is also unclear how quickly a new administration could make such changes. If Biden won the election, he would still need support in both the House and Senate for these changes to be made. It is early days and these proposals are likely to be changed, expanded, and in some cases dropped. However, taxpayers should consider these suggestions when considering selling real estate, planning family tax, paying a dividend, or making investment decisions.