Year-End Tax Planning Under a New Presidency

Contributed by: Ryan Maran, CPA – Manager

Although vote counting and legal challenges continue, it seems more and more likely that former Vice President Joe Biden will become the 46th President of the United States on January 20, 2021. However, control of the United States Senate, which will not be determined until January of 2021, will most likely dictate whether we see the incoming tax rates included in Joe Biden’s tax plan. Despite the uncertainty, significant tax law changes are possible over the next few years. As such, it is important for taxpayers to understand both current tax law and any potential changes a Biden administration may try to enact.

The following is a summary of the key changes Joe Biden would seek to make during his presidency. Under Biden’s plan:

Individual income tax rates
The Tax Cuts and Jobs Act (TCJA) tax cuts would likely be repealed, and the top Federal income tax rate of 39.6% would be reinstated.

Capital gains and qualified dividend income
The top tax rate on capital gains would increase to 39.6% for taxpayers with taxable income over $1 million, plus the 3.8% net investment income tax, resulting in a tax rate of 43.4%. Currently, the top tax rate for long-term capital gains and qualified dividend income is a preferred rate of 20%, plus the 3.8% net investment income tax, resulting in a rate of 23.8%.

Business income from pass-through entities
He would phase out the qualified income deduction, a 20% deduction on business income from an S corporation, partnerships, or sole proprietorship, for those making $400,000 or more. This could effectively increase business income from these sources from 29.6% to 39.6% for top earners.

Corporate tax
The corporate tax rate would increase from 21% to 28%. He would also put in place a new form of corporate alternative minimum tax that essentially would require corporations to pay the greater of their regular income tax or a new 15% minimum tax on worldwide taxable income.

Payroll taxes
The cap on paying the social security tax would be removed for those making $400,000 or more. It is uncertain if wages between $142,800 and $400,000 for 2021 would be subject to the social security tax or whether there would be a gap before the social security tax kicks back in.

Estate tax
The exemption allowance, for which after the estate tax is imposed, would decrease from $11,580,000 per taxpayer to $3,500,000 per taxpayer, also while raising the top tax rate from 40% to 45%. Biden has also suggested eliminating the rules that allow for a step-up in tax basis on the date of death or alternative valuation date.

What does this mean for year-end tax planning?
Assuming taxable income year over year remains similar, but with the possibility of tax rates increasing, a taxpayer may choose to accelerate income and defer deductions to higher income tax rate years. However, if the Senate remains in GOP control, a constate tax rate into next year may see taxpayers choosing the traditional approach of accelerating deductions and deferring income. Perhaps a crystal ball would help us all!

Contact Leone, McDonnell & Roberts Today
Leone, McDonnell & Roberts’ team of skilled accountants and CPAs can help you navigate any upcoming tax legislative changes coming our way in the new year. Contact us today to learn more.