President-elect Joe Biden is moving forward with transition plans following the results of the November 2020 election. One key component of his agenda is reforming the 2017 Tax Cuts and Jobs Act (TCJA) to finance his key priorities, such as incentives for education and renewable energy and expanded healthcare benefits. The ability of the Biden administration to advance all, or only part, of its tax agenda (the Biden Plan) hinges upon the results of the Georgia Senate runoff election in January 2021. If the runoff results in the Senate being controlled by the Democrats, the Biden administration should have a clear path forward to advance all components of the Biden Plan. However, if the Senate remains controlled by the Republicans, it is likely that only portions of the Biden Plan will be advanced. Careful attention also needs to be paid to the 2022 election, as this too will have a material impact on the ability of the Biden administration to fully advance the Biden Plan. Finally, many of the provisions of the TCJA applicable to individuals are set to expire in 2025 regardless of whether the Biden Plan is enacted. This would result in the law prior to the enactment of the TCJA going back into effect for certain expiring provisions identified below.
Summary – Biden’s Game Plan
Based upon the high-level information available to date, the following summarizes key components of the Biden Plan, including how the provisions compare to the TCJA and whether the provisions have a 2025 sunset date under the TCJA:
|Current Law (TCJA) ||After 2025 Sunset of TCJA ||The Biden Plan |
|Top Individual Rate ||37% ||39.6% ||39.6% |
|Top Capital Gains Tax Rate || |
|20% ||For earnings more than $1 million per year, 39.6% |
|Payroll Taxes Phase Out ||Employer and employee subject to payroll taxes up to $137,700 (adjusted for inflation) of earnings ||Similar to TCJA ||Similar to TCJA, but also earnings above $400,000 subject to employer and employee payroll taxes |
|Like-Kind Exchanges ||Applies only to real property held for use in a trade or business or for investment ||Similar to TCJA ||Eliminates like-kind exchanges entirely |
|Standard Deduction/Itemized Deductions ||Doubled the standard deduction, and eliminated or restricted many itemized deductions; also repealed overall limit/phaseout on itemized deductions ||Lower standard deduction, but significantly fewer restrictions on itemized deductions; phaseout limitation applied ||Places cap on itemized deductions of 28%, and restores phaseout limitation for those with income over $400,000 per year |
 Not including the net investment income tax.
|Provision ||Current Law (TCJA) ||After 2025 Sunset of TCJA ||The Biden Plan |
|Estate Tax Exemption ||Exemption of $11.58 million for individuals and $23.16 million for married couples (indexed for inflation); top estate tax rate of 40% ||Exemption of $5.6 million for individuals and $11.2 million for married couples (indexed for inflation); top estate tax rate of 40% ||Lowers exemption to $3.5 million for individuals and $7 million for married couples; increases top estate tax rate to 45% |
|Taxation of Unrealized Gains at Death ||Not applicable ||Not applicable ||With some limitations, unrealized gains are taxable at death |
|Provision ||Current Law (TCJA) ||After 2025 Sunset of TCJA ||The Biden Plan |
|Federal Corporate Tax Rate ||21% ||Remains 21% ||28% |
|Corporate Minimum Tax on Book Profits ||Not applicable ||Not applicable ||15% minimum tax on corporations with book profits of at least $100 million |
|GILTI ||10.5% ||Increases to 13.125% || |
Raises minimum tax to 21% and incentivizes businesses for keeping jobs in the United States
|Section 199A/Pass-through Deduction ||20% deduction on Qualified Business Income earned from a pass-through entity || |
Will no longer apply after 2025
|Phaseout deduction for taxpayers with income over $400,000 |
 Defined below.
 Defined below.
Timing – The Crystal Ball
It is unclear whether any future tax law changes would be prospective in effect from the date of enactment, or if there will be an attempt to enact retroactive changes (e.g., a Jan. 1, 2021 effective date) to tax laws. The following is a deeper dive into the Biden Plan, including initial considerations on what actions taxpayers should consider taking.
Individual Tax Overview
The increases under the Biden Plan to the individual tax rate and the payroll taxes, as well as the cap on itemized deductions, apply to those persons earning greater than $400,000 per year. These proposals constitute rollbacks of income tax reductions made under the TCJA.
- Individual Income Tax Rate – The top individual income tax rate would increase back to the pre-TCJA rate of 39.6% (from 37%).
- Capital Gains Tax Rate – Would increase the tax rate on capital gains and qualified dividends from the current 20% rate (not including net investment income tax) to 39.6% for those individuals with incomes above $1 million per year.
- Real Estate – Eliminates certain tax preferences for the real estate industry, including like-kind exchanges and accelerated depreciation on rental property.
- Payroll Taxes – Currently, employers and employees each pay a 6.2% payroll tax on 2020 earnings up to $137,700 ($142,800 starting in 2021). The Biden Plan would reimpose this 6.2% payroll tax for the employer and each employee on annual earnings above $400,000. Note that annual earnings between the applicable lower threshold and $400,000 would not be subject to payroll taxes.
- Itemized Deductions – Limit the tax benefit of itemized deductions to 28%, meaning taxpayers in tax brackets higher than 28% will face limitations. Additionally, a limitation on the use of itemized deductions for individuals with yearly incomes above $400,000 would be restored.
- Currently, the Biden Plan increase to payroll taxes is not indexed to inflation, so the $400,000 threshold may significantly impact a growing number of taxpayers over the years if implemented.
- The Biden Plan’s proposed capital gains tax increase for individuals with earnings above $1 million is a near-doubling of the rate. Given the recent bull market run, individuals with incomes above $1 million should consider triggering capital gains in 2020 to ensure that the lower capital gains tax rate will apply. Migration to lower tax states, especially if they plan to rebalance their portfolios regardless.
- Re-situs of irrevocable trusts to low tax jurisdictions.
- Accelerate retirement and deferred compensation plans.
Estate Tax Overview
The Biden Plan proposes changes to the estate tax and taxing of unrealized capital gains at death, which are significant departures from both the TCJA and long-standing tax policy. The Biden Plan would reduce the current exemption for 2020 of $11.58 million ($23.16 million for married couples) to $3.5 million for individuals ($7 million for married couples), essentially returning the estate tax to its 2009 levels, and taxing amounts in excess of this exemption at a rate equal to 45%. For unrealized capital gains, current (and long-standing) law allows for a step-up of the tax basis in an asset to its fair market value at death. Under the Biden Plan, the first $100,000 in gains would be exempt, as would small-business stock. After that, unrealized capital gains would be subject to federal tax.
- Given the significant reduction in the estate and gift tax exemption, taxpayers should strongly consider reassessing their estate planning needs and goals and evaluate whether some action should be undertaken by Dec. 31, 2020. This potential issue may be exacerbated in states that have their own estate or inheritance tax (e.g., Pennsylvania, Washington, Oregon and Connecticut, to name a few).
- Since most estate-planning transactions are keyed into low interest rates, so-called estate freezes should be strongly considered (e.g., GRATS, installment sales, etc.).
- Also, some assets have suffered more severely during the pandemic, such as commercial real estate; it may make sense to gift such assets soon.
- Consider making gifts that will allow for discounts for lack of marketability and/or minority interest, such as gifts of certain LP or LLC interests
- During uncertain times, life insurance can serve as a hedge for a wait-and-see approach. Use of a life insurance trust should be considered to avoid estate tax inclusion.
Business Tax Overview
If enacted in full, the Biden Plan would result in increased taxes being paid by and with respect to businesses. Key business tax components of the plan include:
- Corporate Income Tax Rate – Would increase the corporate income tax rate to 28% (currently 21%). Even this increased rate is lower than the pre-TCJA rate of 35%. While most businesses did not expect a 21% rate to result from TCJA, an increase to the corporate rate combined with other Biden Plan business tax items could have a material impact on businesses.
- Corporate Minimum Tax – Would impose a 15% minimum tax on a corporation’s book income (i.e., income as reported in financial statements) where the corporation’s net income is greater than $100 million.
- International Tax Matters – Would reduce the deduction from 50% to 25% on global intangible low tax income (GILTI), which is effectively a tax on worldwide income, and also would require the calculation to be made on a per-country basis. This reduction would result in a 21% GILTI tax rate (currently at 10.5%). Moreover, the Biden Plan would establish a 10% “Made in America” tax credit for investment in revitalizing factories and in reshoring jobs. It also would impose a 10% offshoring penalty for moving certain jobs offshore.
- Phaseout Section 199A Deduction – Certain taxpayers who report business income (i.e., Qualified Business Income) from pass-through entities such as LLCs and S corporations on their personal returns are entitled to a 20% tax deduction under Section 199A with respect to such income. The Biden Plan would phase out this deduction for taxpayers with income over $400,000.
- Fossil Fuel Subsidies – The Biden Plan would eliminate subsidies for fossil fuels.
- The increase in the corporate income tax rate from 21% to 28%, combined with taxing of dividends at ordinary income rates for individuals with earnings above $1 million, could cause a significant increase to the effective tax rates of individuals who operate businesses through a corporation and distribute earnings.
- Phasing out of the qualified business income deduction for pass-through businesses would likely result in business income earned by owners of a pass-through business being taxed at graduated rates as high as 39.6% under the Biden Plan.
- Accelerate revenue and defer deductions.
- Consider exit and succession plans.
How HCVT Can Assist
The impact on individuals and businesses from the global pandemic has made tax planning in 2020 more challenging than ever. The CARES Act brought many legislative changes that are complex. The team at HCVT is here to help you navigate these challenges and help identify saving opportunities. Contact your HCVT relationship partner to discuss planning strategies for 2020 and beyond.