If the Democrats take the Senate in 2021, Democrats could follow the Republican's playbook from the Tax Cut and Jobs Act to make major changes to our nation's tax law. Below we will discuss what tax policies might look like under a Democrat-controlled Congress under President-elect Biden.
Ordinary Income Rate
Under the current law, there are seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent until 2025. President-elect Biden has proposed increasing the top rate to 39.6 percent, the same rate before the Tax Cuts and Jobs Act ("TCJA").
Capital Gains/Dividend Rate Under the current law, capital gains and dividend rates are 0 percent, 15 percent, or 20 percent depending upon the individual's taxable income amount. For 2020, the 20 percent rate applies to:
Single filers whose income exceed $441,450;
Heads of household filers whose income exceed $469,050;
Married Filing Jointly filers whose income exceed $496,600; and
Married Filing Separately filers whose income exceeds $248,300.
There is also an additional 3.8% net investment income tax ("NIIT") for those whose modified adjusted gross income ("MAGI") exceeds a threshold amount. The thresholds for each filing status are as follows:
Married filing jointly: $250,000
Married filing separately: $125,000
Head of household: $200,000
Qualifying widow(er) with dependent child: $250,000
Under President-elect Biden's proposal, the capital gain and dividend rate would increase to 39.6% for taxpayers earning more than $1 million annually and eliminate the step-up basis tax expenditure that allows decedents to pass capital gains to heirs without tax. Including NIIT, the top rate on long-term gains would nearly double from 23.8 percent to 43.4 percent.
INDIVIDUAL TAX INCENTIVES Child Tax Incentives
Under the current law, the maximum Child Tax Credit is $2,000 through 2025 under the TCJA. President-elect Biden has proposed increasing the amount to $8,000 for a qualifying child or up to $16,000 for two or more children. Additionally, President-elect Biden proposes a new $5,000 tax credit for caregivers of individuals with certain physical and cognitive needs and expanding the dependent care and earned income tax credit (EITC).
Limitation on Itemized Deductions
The TCJA eliminated a limitation on itemized deductions (the "Pease limitation"). The Pease limitation reduces the value of itemized deductions for high-income taxpayers. It works by reducing the value of a taxpayer's itemized deductions by 3 percent for every dollar of taxable income above a certain threshold (in 2017, $318,700 for joint filers, $287,650 for heads of households, $261,500 for single filers, $156,900 for married taxpayers filing separately), and capping out at 80 percent of the total value of itemized deductions.
President-elect Biden proposes restoring the Pease limitation on itemized deductions for taxable incomes above $400,000.
Carried Interest or Promote is income that flows to a partner from a private investment fund is taxed at the lower capital gains rates with a three-year holding period requirement for certain long-term capital gain and loss. Like President Trump, President-elect Biden proposes to eliminate carried interest so that they are taxed at the ordinary income rate.
Under the current law, the FICA 12.4 % FICA tax is split between employer and employee. President-elect Biden proposes to eliminate the wage base cap on taxpayers with income above $400,000.
Corporate Tax Rate
Under current law, the corporate tax rate is 21 percent. President-elect Biden proposes increasing the corporate tax rate to 28 percent with an additional tax on corporations with book profits of $100 million or more. Book profit correlates to what companies will often report to their investors, while tax profit is what is listed on their tax return. There are major differences between these two amounts due to Tax laws versus GAAP. As a trivia, Enron's tax income was how auditors were able to determine that Enron's books were not as profitable as they appear to be.
Qualified Business Income Deduction Under current law, the Section 199A deduction allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. President-elect Biden proposes phasing out this deduction for incomes above $400,000. There already exists a phase-out for taxpayers who are in a "Specified Service Trade Or Business."
Energy Tax Incentives Under current law, various credits are available for oil production, electric vehicles, and the production of solar, wind, and other "green" energy. President-elect Biden proposes to halt subsidies for fossil fuels, restoring the full-electric vehicle tax credit and other credits to incentivize both residential and commercial energy efficiency.
Under the previous law, U.S. corporations can defer payment of U.S. income tax on profits from offshore subsidiaries until they are repatriated. The TCJA introduces Global Intangible Low Tax Income ("GILTI") to tax U.S. corporations foreign earnings that exceed a 10 percent return on a company's invested foreign assets.
President-elect Biden proposes ending TCJA incentives for multinationals by doubling the tax rate on GILTI from 10.5% to 21%. Additionally, he would establish a "claw-back" provision to "force" a return of tax benefits for US companies that closed employment locations in the U.S. and sent jobs overseas. Furthermore, Biden proposes "tightening" anti-inversion laws. Anti-inversion laws are designed to make it difficult for US Corporations to restructures so that the current parent corporation is replaced by a foreign parent corporation.
HEALTH CARE TAX
The Affordable Care Act ("ACA") created many new taxes and fees to fund the nation's public health system. The TCJA effectively repealed the ACA. President-elect proposes to strengthen the Affordable Care Act (ACA) by eliminating the 400 percent income cap on tax credit eligibility and lowering the limit on the cost of coverage from 9.86% of income to 8.5%. He also proposes to expand a variety of family tax credits to increase coverage and lower premiums.
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