Tax Code Changes Under the Biden Tax Plan: Strategize Now

As the second quarter of 2021 begins, several things are beginning to come into focus: the vaccine rollout is moving along much better, the pandemic appears to be abating, and restrictions are lifting across the nation. Despite this, there is still quite a lot of uncertainty clouding the future and creating some critically important questions. When will the economy bounce back? Will the virus continue to lessen?  How will President Biden tackle the items on his agenda? Adding to this complexity is predicting how our leaders may begin to tackle the rapidly growing federal deficit. Stimulus spending, combined with the Trump tax cuts, is fueling the debt. Since it is typically not in the federal government’s nature to drastically cut spending, it’s a solid assumption that a tax code overhaul is coming.

Everyone must be prepared to evaluate any tax increase and make strategic decisions to control and understand, as best as possible, the final impact of any tax code changes. While nothing is set in stone, several changes could have a large impact on taxpayers.

How the Tax Code May Change

For individuals with an annual income of more than $400,000 would see their tax bracket increase from 37% to 39.6% and a 6.2% assessment in Social Security tax. Individuals with income over $1 million would see an increase the capital gain tax from 20% to 39.6%. The tax burden adds up to a sizeable portion of one’s income. If possible, accelerate your income, including W-2 compensation, capital gains and all pass-thru business income, into 2021 to try and capture the lower federal individual tax rates.

C corporations would see an increase in their tax rate from 21% to 28%. And in order to prevent “very profitable” large C corporations from paying no income tax, there would be a minimum tax rate of 15% (“alternative minimum tax”) on “book” profits over $100 million, which is likely only to impact very large companies.  If your business is taxed as a traditional C corporation, consult your tax advisor to determine the impact of any increases pending in the federal corporate tax rate, and consider any opportunity to accelerate income into 2021 to capture the lower rate.

And lastly, we can expect a reduction in the lifetime gift and estate tax exemption. Approximately $11.5 million per individual would be reduced to approximately $5.25 million per individual, effectively increasing the potential estate tax on wealthy families.  Be proactive in consulting your estate’s legal counsel and CPA to ensure the maximum wealth is passed along to beneficiaries. Revisit your estate and gifting strategies to maximize the current individual estate tax exemption.

While the proposed tax plan would increase the tax burden on wealthy taxpayers and corporations, the following are examples of tax credits and other enhancements that will affect working families:

• Child and Dependent Care Tax Credit. Increase in credit from $3,000 to $8,000 in tax credits for qualified expenses for low and middle income families with a maximum of $16,000.
• Child Tax Credit. Increase in credit from $2,000 per child to a fully refundable credit of $3,000 per child ages six to seventeen and $3,600 for children under the age of six.
• First Time Home Buyer Tax Credit. Implement an advanceable credit of up to $15,000 for first time home-buyers, similar to the credit that existed in 2008 through 2010.
• Student Debt Assistance. Implement various student debt assistance, forgiveness and deferment programs.

The incoming administration’s plans to effect change are limited by the politics that continue to be ever so present in Washington.  President Biden will likely not be able to get all of his proposed tax changes due to the very thin Democratic margin in Congress. But it is very important that all of us understand what tax changes may come and start to plan for a new bipartisan tax bill sometime in 2021.

The best advice can always be found when seeking counsel from tax professionals. Or else, you may find yourself wondering how a tax bill so quickly turned into a new tax law that threatens your bottom line for years to come.