Good question! Well, it might be the understatement of the year, but over the last 10 months, our lives have been filled with change and uncertainty. Now we face even more unpredictability with a new administration coming in. One thing we here in the accounting world know for sure, is that there will be new tax legislation.
The Biden administration has laid out sweeping changes. In reality, much hinges on what happens in the Georgia election. No matter what the outcome, many of the suggested changes won’t see the light of day. To save us all some time, we’ll take a look at which changes tax payers can most likely expect to see in the next couple of years.
The Trump administration allowed employers to defer the collection and payment of the employee’s share (6.2%) of the FICA tax. Trump hoped to eliminate deferred taxes if re-elected. With the Biden team coming into office, it looks like these deferred taxes will come due in the first quarter of the new year.
The Biden Administration is proposing raising the current wage cap from $137,700 to $400,000. The plan is to have individuals making over $400,000 pay a 12.4% Social Security payroll tax. Under the new plan, individuals making between the old wage cap and the new wage cap will not be taxed.
Individual and Corporate Tax Rates
Under the current law, there are seven tax brackets, with the highest at 37% for a single taxpayer earning more than $523,600. Biden has proposed increasing the top bracket to the pre-Tax Cuts and Jobs Act (TCJA) level of 39.6%. This would apply for those with a taxable income above $400,000. The proposed corporate tax rate increase would go from 21% to 28%. In addition, the new administration has proposed a minimum tax on corporations with book profits of $100 million or more.
Individual and Business Deductions
The plan is to go back in time when it comes to itemized deductions for taxable incomes above $400,000. The Biden administration would like to restore a limitation on itemized deductions, or what’s known as the Pease Limitation, for taxable incomes above this amount.
For earners under $400,000, expect a limit of 28% of adjusted gross income for itemized deductions. For each dollar of itemized tax deductions, including charitable contributions, a taxpayer or couple filing jointly would only receive a maximum benefit of $0.28.
Under the current Tax Cut and Jobs Act, small business owners can deduct up to 20% of their business income, capped at $163,300 for single filers and $326,600 for joint filers in 2020. Regarding qualified business income (QBI) deduction, again, for those making over that magic number of $400,000. the Biden plan is to phase out the deduction.
Retirement Savings Changes Biden hopes to spur employee participation in retirement savings accounts by providing a higher tax credit to a person making a lower salary who contributes to a 401(k) plan. The plan also includes subsidies to help create more employer plans.
Currently, a capital gains rate of 0, 15 or 20 percent applies to capital gains and qualified dividends received by individuals. The exact amount depends upon the amount of the individual’s taxable income. This year, the top rate of 20 percent applies to joint filers with taxable incomes over $501,600. ($473,750 for heads of households, $445,850 for single filers, and $250,800 for married taxpayers filing separately).
Biden’s administration has proposed increasing the top tax rate on long term capital gains for taxpayers earning more than $1 million annually and to eliminate the step-up basis tax expenditure that allows decedents to pass capital gains to heirs without tax. In the new plan, the top rate on long-term gains would increase to 43.4%.
Child Tax Incentives
Biden’s plan aims to give a leg up to middle- to lower-income families with a temporary increase in the child tax credit. For children up to age 17, the credit will go up $1,000 to $3,000 per child (previously this credit was available for children up to age 16). For children up to age 6, there is a $600 bonus, bringing it up to $3,600 per child.
There is also a proposed expansion of the child and dependent care tax credit. Currently, the maximum credit is $2,000 through 2025 under the TCJA. The proposal is to increase this to $8,000 per child or $16,000 for more than one child for families making less than $125,000 a year. In addition, there is a proposed $5,000 credit for caregivers of individuals with certain physical and cognitive needs.
We wish we had a crystal ball and could tell you exactly what to expect in 2021. But if we’ve learned anything from this year, none of us can predict what will come out of Washington D.C. Time will tell which of these pieces of tax legislation makes it to the finish line. In the meantime, we’re here to help with any questions and to help you prepare.