Comparing potential futures for individual tax policy under two presidential candidates

Joe Biden has released his tax proposal as part of his campaign literature. As always, a proposal set forth by a campaign is a vision and general outline of the policy objectives he would pursue as president. However, there are enough specifics that clients and advisors should be aware of in order to plan ahead should Biden win the election. In most cases, changes in tax law are applied on a prospective or forward basis but there is always a chance that some provisions could be applied retroactively. Should some of the proposals become law, they could take effect as of January 1, 2021. Clients will need to be ready to quickly address their income and estate planning depending on the results of the election.

The chart below summarizes the Biden tax plan compared to current law.

 

Current tax law 

Biden tax proposal

Individual tax rate

Top individual income tax rate is 37%.

Top rate 39.6% for MFJ filers with taxable income over $400,000.

Preferred rates for long term capital gain and qualified dividends

Long terms gains and qualified dividends are taxed at the top rate of 20%, plus a 3.8% net investment income tax (NIIT). 

Raise the top rate on long term gains and qualified dividend to the the top ordinary income rate of 39.6% for taxpayers with income over $1 million. There was no proposal with respect to the NII so it is expected to remain at 3.8%.

Payroll tax

Social Security (SS) tax is split evenly between employers and employees. Currently a 12.4% SS tax is imposed on wages up to $137,700.

Keep the current limit of $137,700 for SS tax, provide a holiday on payroll above the amount up to $400,000 and reimpose the 12.4% SS tax for wages above $400,000.

Itemized deductions

Limits the state, local and real estate tax to $10,000. Suspends the 3% itemized deduction limitation on high income taxpayers. 

The plan would eliminate the current limit and allow for full tax deduction. The 3% itemized deduction limitation for taxpayers with income above $400,000 (for MFJ) will be restored. 

Section 199A qualified business income (QBI) deduction

There is a 20% deduction allowed for qualified business income. The deduction is subject to limitations based on wages and unadjusted basis in depreciable assets. 

The Trump administration would like to make the QBI deduction permanent. 

No change to the QBI deduction for taxpayers with taxable income under $400,000 while phasing the deduction out completely for those with income over $400,000. 

What it all means?

Those with adjusted gross income in excess of $400,000 will see a significant increase in tax under the Biden’s income tax proposal. The proposal specifically targets those with AGI over $400,000 by:

  • Increasing the top individual tax rate to 39.6 percent.
  • Reinstating the limitation on itemized deductions for those with income above $400,000.
  • Phasing out the qualified business income deduction for those with taxable income above $400,000.
  • Imposing the social security tax on wages over $400,000.
  • Eliminating the preferred rate on long term capital gains and qualified dividends for taxpayers with income over $1 million.
  • It is not clear if the preferential tax rate would apply to gains under $1 million or if only gains over $1 million will be taxed at the top individual tax rate.

It is unknown whether any of the proposal would become law or even how soon a new tax law would become effective. Even with a Biden victory and a supportive Congress, there is no guarantee that his proposal will be the final law. In any event, it should not stop you from discussing planning strategies with your tax advisor to be ready to act should the circumstances warrant.

Please contact your Mazars professional for additional information.

Published on October 30, 2020

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