The election of two Democratic Senators in early January has given the new President a slim majority in the Senate and the House, improving the odds of passing at least some of Biden’s signature tax proposals. The new administration will likely have far more urgent priorities in its early days, so any major tax law changes are probably at least a year away. But if they were to pass, many of his proposals would have major consequences for Abacus clients and their families and businesses.
It makes sense, therefore, to preview what the proposed changes might mean for your financial plan. Many of Biden’s proposals turn the clock back to previous tax law, but there are some important differences from the past as well.
Higher Taxes for the Affluent
If you watched the Democratic primary, you know the affluent were common targets for most candidates. Biden is no exception, although to date he has not proposed an actual wealth tax, and he has said those who make less than $400,000 will not see a tax increase.
Here are some of his most important ideas for asking the wealthy to pay more:
- An increase in the highest tax bracket (from 37% to 39.6%)
- A cap on itemized deductions
- Limits on 1031 “like-kind” real estate exchanges
- Higher capital gains taxes for those with more than $1 million in investment income
- Higher Social Security taxes for people making more than $400,000
An End to “Step-Up” in Cost Basis for Inherited Assets
Two other Biden proposals would have a significant impact on Abacus client financial plans. First, he has proposed eliminating the “step-up” in cost basis for inherited assets. Right now, when Ann inherits her mother’s Apple stock, the cost of that stock for tax purposes is “stepped up” from what her mother paid to the value of Apple stock on her date of death. So Ann’s mom might have paid only $30 per share for stock worth $130 per share on the date she died. When Ann decides to sell the stock, she will only be taxed on gains above the $130 price. An end to the “step-up” would be consequential for many taxpayers, not just the wealthy, and particularly for those who hope to inherit and sell their parents’ homes or other appreciated real estate.
Changes to Estate Taxation
Another important Biden proposal targets the estate tax. Current law exempts estates below $11.7 million (or $23.4 million for couples) from estate taxes. Biden proposes to reduce this exemption amount to $3.7 million ($5.4 million for couples), making the number of people paying estate taxes dramatically higher. This will be a very controversial proposal, and it is ripe for compromise, but it makes sense to start assessing the likelihood of estate taxes if your estate will total more than $5 million.
Help for the Young, the Elderly, and the “Sandwich Generation”
While targeting the wealthy for tax increases, Biden proposals also seek to provide relief to college students and their parents, middle income taxpayers, the elderly, and people working to build financial resources. Many of these proposals might provide significant assistance to Abacus clients and their adult children.
In particular, we are closely following any proposals to make health insurance less expensive. Biden was not a “Medicare for All” candidate, but his recent proposals indicate he is on board with a public option of some kind, as long as people can stay on a private plan if they prefer. He remains motivated to protect and enhance the Affordable Care Act, as it is a significant part of his Obama era legacy. For instance, he wants to eliminate the income cap on the ACA premium tax credit, effectively ensuring no family pays more than 8.5% of their income for the Gold plan.
Other tax proposals that could provide relief to the middle class, and in some cases to everyone, include:
- Restoring the Electric Vehicle Tax Credit
- Helping elderly taxpayers who pay for Long Term Care insurance
- Helping family caregivers who provide long-term care to the elderly–including the ability to make contributions to retirement accounts
- Expanding tax benefits for military spouses
- Re-establishing the First-Time Homebuyers’ Tax Credit
- Creating a refundable renter’s tax credit capped at $5 billion per year, aimed at holding rent and utility payments at 30 percent of monthly income
- Expanding the Child and Dependent Care Tax Credit and the Child Tax Credit (CTC)
- Expanding the Earned Income Tax Credit (EITC) for childless workers aged 65+
Student Debt
Biden has also signaled he is serious about helping current and former college students; on his first day in office, he extended the student loan payment pause through Sept. 30, 2021. The President has also renewed his support for canceling at least $10,000 of federal student loan debt per person as part of COVID-19 relief, which would wipe out all debt for 32% of student loan holders. Significantly, this loan relief would not count as taxable income to the borrower. While avoiding the broader debt cancellation proposals of other Democratic primary candidates, Biden has proposed initiatives to cancel more student debt for low earners, people who attended HBCUs and other minority-serving institutions, and people who work for eligible community service providers after college.
Higher Taxes for Business, Including Small Businesses
The Tax Cuts and Jobs Act of 2017 famously dropped the top corporate tax rate from 28% to 21%. Biden’s proposals restore the 28% rate and set a minimum tax on corporations with profits greater than $100 million. Other business related proposals phase out the Section 199A qualified business deduction (QBI) for business owners with taxable income over $400,000 and increase taxes on foreign subsidiaries of US firms.
Tax Proposals Related to Job Off-shoring, Climate Change, and Worker Protection
Not all Biden proposals are designed primarily to increase tax revenues. Some also target incentives to keep jobs in the US and protect workers and the environment:
- A Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
- Tax credits for small businesses that offer worker retirement savings plans or hire disabled workers
- An end to tax subsidies for fossil fuels
- Renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage
- A 10% surtax on companies that off-shore US jobs to foreign countries
- A “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll
As always, Abacus will be paying close attention to any changes that might affect our clients’ future planning goals. Whether you are a long-time client or would like help in aligning your money with your values for the first time, feel free to reach out to an advisor who will be happy to guide you through this transition.
