On December 22, 2017, President, Donald J. Trump, signed into law the Tax Cuts and Jobs Act (TCJA) that brought sweeping changes to the domestic and international U.S. tax system. The TCJA contains a “sunset” for many of its provisions and some will cease to exist at the end of 2025 unless additional legislation is passed. President-elect Biden may now consider repealing certain tax laws before the sunset provisions lapse. During the election campaign, President-elect Biden’s proposed tax changes indicated that tax revenue would increase by $2.65 trillion over the next decade with 6.5% less after-tax income for the top 1% of taxpayers. A focus was placed on raising taxes on labour, investment and business income for those earning over $400,000 and an increased payroll tax for the wealthy. If the democrats win the Senate and can pass legislation easily, what are the potential tax changes for individuals, employers and businesses?
Post TCJA, the top individual tax bracket was lowered to 37%. President-elect Biden’s proposed tax plan, reverts back to pre-TCJA levels of 39.6% for taxable incomes above $400,000.
Long-term capital gains (LTCG) and qualified dividends will be taxed at the highest U.S. tax rate of 39.6% if an individual’s income exceeds $1 million, annually.
Deloitte's view: Immediate tax planning is required in the wake of the proposed 19.6% tax increase on the sale of LTCG assets. Possible strategies to help mitigate the increase in tax: sell appreciated stock, invest into non-dividend paying stock, use municipal bonds in a well-balanced portfolio, and accelerate sales of tangible property.
Post TCJA, itemized deductions were changed significantly, with state and local taxes being capped at $10,000 to the dismay of taxpayers in high state tax jurisdictions. President-elect Biden intends to revert back to pre-TCJA itemized deductions but proposes a cap to itemize deductions at 28% for taxpayers earning more than $400,000. Furthermore, the “Pease limitation” would be implemented that reduces total itemized deductions by 3% of Adjusted Gross Income for every dollar of taxable income exceeding $400,000.
Deloitte's view: The proposal could increase tax equalization costs for employers if assignees have substantial assignment income that causes them to have limited itemized deduction benefits. Furthermore, under current law, qualified charitable contributions are uncapped. The proposed change will affect future charitable deductions if limitations are introduced. Individuals should consider 2020/2021 accelerated charitable contributions.
Sole proprietors, partnerships and S corporations, may have become accustomed to the post TCJA section 199A deduction. Simply put, it allows owners to deduct up to 20 percent of the domestic qualified business income (QBI) earned by the business on the owner’s tax return, subject to other significant limitations. President-elect Biden proposes to phase out the QBI deduction for taxpayers whose income exceeds $400,000.
An additional U.S. Social Security Tax of 6.2% will be imposed upon individuals earning above $400,000, annually. The combined 12.4% tax would be split 50:50 between the employer and employee. To put this into context, the current social security wage cap for the 2020 tax year is $137,700. Therefore, under the new proposals, no social security tax would apply to individuals between the income levels of $137,700 and $400,000. The additional tax on earnings above $400,000 is estimated to raise tax revenue of $819.9 billion.
Deloitte's view: The proposed change will lead to increased assignment and tax equalization costs for employers and may create complications around the application of FICA on nonqualified deferred compensation plans. Furthermore, companies will need to plan accordingly for the additional payroll reporting requirements and provide employee education on the proposed change.
The favourable “step-up in basis” will be eliminated for heirs who receive property from a decedent and the current federal estate and gift tax exemption of $11.58 million will be reduced by 50% to $5.79 million.
Deloitte's view: U.S. estate tax planning will need to be reviewed on a case-by-case basis to help individuals combat the proposed exemption reduction and the loss of the “step-up in basis” for inherited capital assets. Individuals can consider accelerated gifting in 2020/2021 to reduce their lifetime gift tax exemption. Furthermore, trust structures, such as a Grantor Retained Annuity Trusts (GRATs) could be created to help mitigate the proposed reduction.
Post TCJA, the corporate tax rate was reduced from 35% to 21%. President-elect Biden would like to increase the corporate rate to 28% and also implement a new form of Alternative Minimum Tax (AMT), subjecting corporations with over $100 million in net profit to pay at least 15% in corporate tax.
Deloitte's view: In our experience, it is beneficial for individuals and employers to be proactive and not reactive when potential tax changes are on the horizon. Deloitte`s team of accomplished U.S. tax professionals can provide a holistic approach to an individual’s specific set of circumstances to help navigate the changing tax landscape.
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