Last month, Joe Biden was sworn in as the 46th President of the United States. He and the Democratic Party have traditionally supported tax policies that would raise taxes on the richest Americans. A report co-authored by Biden in July 2020 said: “A guiding principle on our tax agenda is that the richest Americans can shoulder more of the tax burden.” The president focused on “ending expensive and costly unproductive tax loopholes.” “
With the Democrats now in control of both houses of Congress, any future Biden tax plan will be much easier to enforce, as it only takes simple majority votes to pass sweeping laws. Such a tax bill could be given an increased priority to reduce the huge federal budget, especially given the significant cost associated with recent coronavirus control legislation.
While neither of us can predict if or when Biden’s tax plan will be introduced in Congress, it is important to be aware of some provisions that might be in such a bill that could affect you in the near future.
More inheritance tax
Inheritance tax is levied on property that you own at the time of your death. Currently, the inheritance tax exempt amount is $ 11.7 million per person. Biden’s plan would be to reverse the continued increases in this exemption amount approved by the Tax Reduction and Employment Act 2017 and revert to previous levels of $ 5.85 million or possibly lower thresholds. This would significantly increase the number of taxpayers who would be subject to estate tax on death. Biden has also announced plans to increase the maximum inheritance tax rate from 40% to 45%.
High earners
While most income tax rates would stay the same under Biden’s plan, the top tax rate could rise from 37% to 39.6%. While it is not clear what income level this rate would apply to, Biden has often indicated that only taxpayers with annual incomes above $ 400,000 would see a tax increase. Another proposal would set a cap on individual deductions for those earning more than $ 400,000 and further increase the amount that is subject to income tax each year.
capital gain
Currently, capital gains and dividends received by individuals are taxed at 0%, 15%, or 20% tax rates, depending on the individual’s taxable income. For 2021, the 20% rate applies to individuals earning $ 445,850 annually or married couples filing together for $ 501,600. Biden has proposed taxing capital gains and dividends at the highest normal income tax rate of 39.6% for individuals with annual income of $ 1 million or more. In addition, the maximum rate for long-term gains, that is, gains on assets held for more than a year, would almost double.
Corporate taxes
The current corporate tax rate for companies is 21%. Biden would try to increase that rate to 28%. While pass-through corporations such as partnerships, limited liability companies, suburban companies, and sole proprietorships can currently deduct up to 20% of net income annually, Biden would deduct such deductions for companies with incomes greater than $ 400,000 per year achieve, eliminate.
“Reinforced” base
Under current law, the tax gain or loss of an asset on sale is the difference between its value at the date of sale and its cost base, e.g. B. what you paid for it. When a person dies, the cost base for the deceased’s property is adjusted or “increased” to the market value of the asset at the time of the owner’s death. This has traditionally enabled those who inherit property to avoid sometimes paying substantial taxes on profits made during the period that the deceased owned the property. Biden has indicated that his tax plan could include lifting that base increase upon death, which could result in a substantial tax on the sale of inherited properties.
It’s impossible to know if or when a new tax law will be introduced that could implement some of these changes. Indeed, given the myriad of other issues the Biden government is facing amid a pandemic, it may be next year before action is taken on the tax front.
For those who may be negatively affected by the changes outlined above, now is the time to get in touch with your tax or estate planning professional to discuss strategies to prepare for this possible tax overhaul.
Andy Peebles is an estate planning and business attorney with Carnahan, Evans, Cantwell & Brown PC law firm. He can be reached at apeebles@cecb.com.