With the President-Elect taking office in January, the senate election in Georgia has potentially huge tax consequences. The runoff election, required because no candidate received 50% of the vote, will be held on January 5th. The Democratic Party will take control of the senate if both democratic candidates win.
The odds are not in the Democrats favor, but it is certainly possible they can pull out a win. With a Democratic senate majority we expect some big changes to the tax law. I am going to discuss a few of the proposed Biden tax reform points in the next few paragraphs.
Capital Gains Tax
The proposed Biden tax reform plan, which you can read about on his campaign website here, taxes capital gains and investment income at 39.6% for taxpayers with incomes over $1,000,000. And don’t forget about net investment income tax (3.8%), that’s not going anywhere.
Taxpayers planning to sell capital assets for a gain in 2021 may want to accelerate the deal to close in 2020. For example, selling an investment property for a gain of $500,000 could mean a difference in tax of $98,000 if sold on 12/31/2020 versus 1/1/2021. If you plan to retire and sell your business in 2021, maybe you should consider speeding that up before year end. The short timeline makes that example unlikely, but something to consider.
The Tax Cuts and Jobs Act of 2017 increased the estate tax exemption to $11,580,000 in 2020, allowing substantial tax free transfer of wealth. According to Taxfoundation.org, Biden’s plan could see the exemption revert back to 2009 levels at $3,500,000 and the tax rate go from 40% up to 45%.
Taxpayers might consider gifting assets to their heirs before year end.
Qualified Business Income Deduction (QBID)
The proposed Biden tax reform plan would phase out the 20% QBID deduction for taxpayers with taxable income over $400,000. If you are a cash basis tax payer with income greater than $400,000 and wages high enough to preserve the deduction, consider moving some income into 2020, or move deductions out to 2021.
The Biden tax reform proposals would reduce itemized deductions in two ways:
- The itemized deduction rate would get capped to 28%. People in a 39.6% tax bracket would only get $0.28 of deduction for every dollar of itemized deduction.
- Reinstatement of the “Pease Limitation,” which begins reducing itemized deductions for every dollar of taxable income over $400,000.
You may consider making larger charitable contributions in 2020, or move planned 2021 contributions to 2020. If you are not sure who to make the contributions to, consider making it to a donor advised fund. This will allow you to take the deduction in 2020 and direct it to the organization of your choosing sometime in the future.
Other Significant Tax Changes
- Social Security Tax on wages taxes the first $137,700 of wages at 12.4% in 2020 ($142,800 in 2021.) Biden’s tax reform plan would reinstate the 12.4% tax for wages above $400,000.
- The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%. Biden’s tax reform plan would increase the corporate rate to 28%.
- Global Intangible Low Tax Income (GILTI), a tax on foreign subsidiaries of US firms, would increase from 10.5% to 21%.
- Corporations with book income in excess of $100,000,000 would have a minimum 15% tax.
- Top individual tax rate would move from 37% to 39.6%
- Child tax credits increased from a maximum of $3,000 in qualified expenses to $8,000, along with an increased reimbursement rate from 35% to 50%.
- Reestablishment of the First-Time homebuyer’s Tax Credit up to $15,000.
Closing Thoughts on Biden Tax Reform
Georgia’s senate election makes year end planning difficult in an already volatile economic environment. It is important for taxpayers to educate themselves on the proposed Biden tax reform plan to make smart year end planning decisions. Future tax rates could go either direction depending on the outcome of the election.