The phones have been ringing off the hook with the same question: How might Joe Biden’s tax policy affect me and/or my business?  The answer depends on the January 5th, 2021 Georgia runoff Senate contests.  If both Democratic candidates are victorious, all three branches of government will be under President-elect Biden’s control, and his tax policy could come to fruition. If Republicans win one seat, it is highly unlikely any of his tax policies will be implemented.  Since I’m very poor at predicting the future, let’s explore the Biden tax platform.  The sources of this information are Joe Biden’s website and the Wall Street Journal.

Joe Biden’s website touts that he will not raise income taxes on anyone making less than $400,000.  For everyone else, your tax bill would likely increase.

First let’s explore proposed tax cuts:

  • An expanded child tax credit to $3,000 per child and $3,600 for kids under 6.
  • A new tax credit for first time homebuyer’s up to $15,000.
  • A new tax credit to ensure that no family spends more than 8.5% of their income on health insurance.
  • Provide tax savings for low-income taxpayer contributions to retirement plans by awarding a tax benefit at the highest income tax rates.

For corporations, he proposes to raise the current tax rate from 21% to 28%.  This rate increase would affect all C-Corporations, but mostly affects large publicly-traded companies

Proposed tax increases affecting individuals:

  • The top tax rate would increase from 37% to 39.6%.
  • He proposes to reinstate the phase-out of itemized deductions for high income individuals.
  • If your W2 wage is over $400,000, he has proposed to impose the 12.4% payroll tax on the excess.  Presently, this tax ends when your wage exceeds $137,700.  He has proposed to re-instate the individual ACA insurance mandate. This would bring back the penalty for individuals that choose to not have health insurance.
  • The maximum long-term capital gains rate is presently 23.8%.   Under Biden, if your taxable income is over $1 million, your rate will be 39.6%. 
  • The Biden campaign has discussed imposing a capital gains tax at your death. Honestly, this is the most creative and albeit, bizarre proposal.  For example, at the death of a second spouse, the unrealized gain on all assets would be subject to capital gains tax.  The plan would exclude the first $100,000 of gain and a larger exemption for personal residences.  Effectively this is an estate tax on the middle class and an additional estate tax on the wealthy. 

Proposed tax increase affecting small businesses:

  • For several years, there has been a 20% deduction for small business income (Section 199A QBI deduction).  This is effectively a tax credit of up to 7.4% relating to business income.  President-elect Biden has proposed to repeal this benefit, even for taxpayers making less than $400,000 per year.

Proposed estate increases:

  • Presently a married couple enjoys a $23.4 million exemption before the 40% estate tax hits their wealth.   Under present law, on January 1, 2026 this exemption sunsets to one-half of that amount.   The Biden campaign wasn’t entirely clear on his intentions with respect to this tax.  Apparently, based on my research, Biden intends to accelerate this sunset provision.   However, the Wall Street Journal reports that he may wish to revert the exemption to 2009 law at $3.5 million.   
  • Since 1913, the tax code has allowed heirs to “step-up” the basis in assets if inherited after death. This allows refreshing of basis to wash away capital gains for the next generation.  In South Dakota, this benefit is of particular importance to farmers and ranchers who see their land increase in value due to inflation.  The Biden platform eliminates this tax benefit.

For me, the Georgia Senate races are more interesting than the November election.   Keep watching the KTLLP website for updates and reach out to your Ketel Thorstenson, LLP advisor if you have concerns or questions.