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Biden’s Proposed Tax Law Changes: What You Should be Aware Of

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The 2020 presidential election is now less than one month away. In this election cycle, there are many “hot button” issues, some of which may affect you and some that may not. There is one issue that will affect almost all of us: tax law. It should come as no surprise that the Democratic party plans to make changes to tax laws if they regain control of the White House (and potentially Congress).

In this post, we provide a snapshot of candidate Biden’s tax agenda. Note, it is never the case that a candidate’s proposal becomes law without changes and even if major changes do occur, it does not happen quickly. We don’t recommend making knee-jerk changes to your portfolio or your financial plan based on a potential election outcome. We do, however, recommend understanding how each candidate’s proposals may impact your financial life so you can be prepared to make the best decisions.

Let’s start with information from Vice President Biden’s website:

“Joe Biden will not raise taxes on anyone making less than $400,000. Period. But he will ask wealthy Americans and big corporations to pay their fair share, including by:

  • Raising the corporate tax rate to 28 percent.
  • Requiring a true minimum tax on ALL foreign earnings of United States companies located overseas so that we do our part to put an end to the global race to the bottom that rewards global tax havens. This will be 21% — TWICE the rate of the Trump offshoring tax rate and will apply to all income.
  • Imposing a tax penalty on corporations that ship jobs overseas in order to sell products back to America.
  • Imposing a 15% minimum tax on book income so that no corporation gets away with paying no taxes.
  • Raising the top individual income rate back to 39.6 percent.
  • Asking those making more than $1 million to pay the same rate on investment income that they do on their wages.”

Additional proposed changes include:

  • Biden has pledged that he will not raise taxes by changing income tax brackets on those earning less than $400,000. Those earning above $400,000 (it isn’t immediately clear if that applies to single or joint filers) would expect to see the top tax brackets move back to around pre-2017 Tax Cuts and Jobs (TCJA) levels.
  • The Biden tax plan would prevent business owners who earn $400,000 and above from benefiting from the Qualified Business Income (QBI) deduction, which has been of major benefit to certain categories of business owners.
  • The Biden plan proposes capping the value of itemized deductions at 28%. While this item has the potential to significantly impact high wage earners, the majority of Americans claim the standard deduction instead of itemizing their deductions, which means that they would not be impacted.
  • Biden proposes to eliminate the tax deduction for contributions to retirement plans, including traditional IRAs and employer-sponsored plans, like 401(k)s. Instead of a deduction, the account holder would enjoy a tax credit as a reward for their savings. The goal of the proposal is to make retirement savings equally beneficial regardless of earnings. The effect would be to benefit lower earning individuals while reducing the tax savings currently enjoyed by higher wage earners.
  • Biden’s tax plan includes a change to the treatment of capital gains rates for households with income over $1M. Currently, long-term capital gains and dividends enjoy lower tax rates than other forms of income. Under Biden’s plan, long-term capital gains and dividends would be taxed at ordinary income tax rates after $1M in total income. Again, this proposal would not impact the majority of Americans, but it would increase taxes on the very wealthy.
  • Biden proposes removing the ability to utilize 1031 Exchanges for those earning above $400,000. 1031 Exchanges facilitate the deferral of income taxes on certain real estate transactions.
  • Biden proposes changes to the step-up in basis rules at death, potentially eliminating the step-up in basis for many assets. The proposal is light on details at this time.
  • Biden’s tax plan proposes reducing the Federal estate and gift tax limits. The limits would be reduced from approximately $11.5M to around $6M per person.

On the campaign’s website, Biden provides the following additional tax-related proposals. (We have included the highlights only. We encourage you to visit the website for full details.)

  • Expand the Child Tax Credit to help families through the crisis. Biden will increase the CTC to $3,000 per child for children ages 6 to 17 and $3,600 for children under 6. He will also make the CTC fully refundable.
  • Biden will ensure that no family spends more than 8.5% of their income on health insurance by expanding access to refundable health premium tax credits. 
  • Biden will offer up to $8,000 in tax credits to help low-income and middle-class families pay for childcare. This is a major expansion of the existing tax credit which could mean up to $6,800 in additional tax relief each year for such families.
  • Tax credits that help working families pay for the cost of caring for an aging loved one, modeled off of legislation supported by AARP. Biden will also increase the generosity of tax benefits for older Americans who choose to buy long-term care insurance. 
  • Tax credits to help families buy their first homes and build wealth — up to $15,000.

Let us say it again: now is not the time to begin making changes to your financial plan. It is, however, the appropriate time to understand what may occur in some form in the future. Regardless of what the future holds, we will be prepared to help you implement the strategies you need to live your best financial life.

 

 

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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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