How Taxes Will Change With A Biden Presidency

How Taxes Will Change With A Biden Presidency

It is certain who will be the next President. Joe Biden will become Potus 46 and the big question is: will taxes go up?

Joe Biden promised to raise taxes with a staggering $3.5 trillion.  He warned that he would cancel the Trump tax cuts and raise taxes for everyone who earns more than $400,000 per year corporations and individuals.  High earners should be worried about a Biden presidency.

Biden promised incentives to cut taxes for lower-income taxpayers, including refundable credits for everything from paying childcare costs to buying a home.  For these taxpayers, Biden promised more money in their pockets after they paid their taxes.

It’s another matter entirely for Biden to keep these promises.  If the Democrats do not take back the Senate, nothing will come of nothing, to quote King Lear.  The two January elections in Georgia will be crucial to decide who controls the Senate.  Currently, the Republicans have a majority of two votes in the Senate (50 Republicans versus 48 Democrats).

If Republicans retain one Georgia Senate seat, Joe Biden’s promises might very well be moot.  To do what he promised, Biden would have only 49 Senate votes instead of the typically required 60 votes.  It is hardly likely that 11 Republicans would cross the aisle to wipe out Trump’s tax cuts and raise taxes for those in the higher income bracket.  Even Biden’s promised tax cuts for low-income taxpayers will probably die in the Senate. Recent historical precedent makes a bipartisan vote for Biden’s plan highly unlikely.

If the Democrats wipe out the Republican majority in the Senate, even if they get on par via a 50-50 split with Republicans, everything will change.  The Budget Reconciliation Process provides a shortcut for bills that affect revenue and spending, so tax legislation is fair. In 2017, President Trump used it to pass his TCJA, which introduced tax cuts of $1.5 trillion.  Not a single Democrat took a bipartisan approach for Trump’s bill.

In terms of the Budget Reconciliation Process,  a bill that arrives in the Senate needs only 51 votes to pass. The requirement for a 60-vote majority becomes redundant when the same political party controls the White House, House of Representatives, and the Senate. When this occurs, one republican vote would be all Biden would need to put his stamp on the new tax law.  A 50-50 split in the Senate gives the Vice-President a tie-breaking vote, and Kamala Harris will undoubtedly vote for the promised tax hikes.

However, Biden would have to walk a fine line: even one dissenting Democrat will derail his tax bill.  Sometimes defections happen, like when Trump tried to repeal Obamacare using the same Reconciliation process shortly after taking the White House. History often repeats itself.  Elections matter, and if the Democrats take the Senate, Republicans would be impotent, and the Biden Tax Hike would become a reality.

Increased Ordinary Income Tax, Capital Gains and Qualified Dividends Tax

Biden says no one in the US who earns less than $400,000 per annum will pay more taxes.  He says he will collect an additional $3.5 trillion from Americans who earn more than $400,000 annually.  To do this, Biden intends to change the top rate on ordinary income from 37-percent to 39.6-percent.

The Biden Administration intends for single taxpayers who earn more than $520,000 per annum and married taxpayers earning more than $620,000 per annum to pay 39.6% tax.

Trump’s TCJA of 2017 reduced the top rate of ordinary income from 39.6% to 37%. Regarding the US’s progressive tax system, tax rates on regular income go up progressively according to your income, starting at 12-percent.

Biden’s Tax Hike’s second leg aims to double the tax rate for long-term capital gains and qualified dividends, which are currently taxed at the highest rate of 20%. In contrast, the median rate is 15%, and taxpayers in the 10-and 12-percent brackets pay tax at a zero-percent net rate.  Taxpayers who earn more than $1 million in capital gains and qualified dividends will pay a whopping 39.6% tax under a Biden regime.

Increased Payroll Tax

Another Biden promise is to increase Social Security Payroll Tax for US taxpayers who earn more than $400,000.  Some who earns $500,000 per year will pay 6.2% Social Security Tax on their income between $137,700 and $400,000. They will pay an additional 6.2% tax on their earnings between $400,000 and $500,000.  Additionally, they will also pay 1.45% Medicare tax on all salary and wages and 0.9% Obamacare tax on the same above $250,000 if they are married.

Under the Trump administration, employees pay 6.2%  Social Security Payroll tax only up to the Social Security wage base, which was $137,700 for 2020.  Everyone pays a 1.45% Medicare tax on total salary or wages.  Taxpayers who earn a wage or salary of $200,000 (or $250,000 if married) pay an additional 0.9% payroll tax for Obamacare.

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Increased Qualified Business Income And Itemized Deductions Tax

Joe Biden promises to eliminate the 20% Qualified Business Income (QBI) deduction for taxpayers who earn more than $400,000 per year.  He intends to phase it out.

Under the Trump administration TCJA, taxpayers operating as S corporations, partnerships, or sole proprietorships can claim a deduction equal to 20% of the business’s qualified income, which reduces the effective tax rate for this type of income from 37%t to 29.65%.

Joe Biden wants to make two changes to the law on itemized deductions.  If you earn more than $400,000 per year, he will reintroduce the Pease-limitation. Secondly, he promises to cap the benefit of itemized deductions at 28%.

The Pease-Limitation

According to this provision, a taxpayer’s total itemized is reduced by three percent for every dollar he earns above $400,000 per year.  This provision was scrapped by the TCJA of 2017 under President Trump.

If Joe Biden does cap the benefit of itemized deductions at 28-percent, he will increase the real taxes paid even by American taxpayers who earn only $200,000.

The current top rate for a US taxpayer who earns $200,000 is 32%.  In Biden’s world, this taxpayer pays 32% on his last dollar of income and will now get only a 28% deduction from their last dollar paid out for mortgage interest or charitable donations.  This is a significant tax increase for those who earn as little as $200,000 per year.  According to analysts at Forbes, Biden would not allow this benefit deduction to kick in until income exceeds $400,000 per year.

Under Trump’s TCJA of 2017, taxpayers can deduct either the standard deduction or the sum of the itemized deduction, whichever is greater.

The itemized deductions include mortgage interest, medical expenses, state and local income, property taxes, and charitable contributions.  Under Trump, the standard deduction is $12,700 for single and $24,800 for married taxpayers.  Trump limited certain itemized deductions, including state-and-local income and property taxes, which was capped at $10,000, but he removed any overall limitations on a taxpayer’s itemized deductions.  As a result, itemized filing decreased from 30% to 11% for 2018.

Increased Corporate Tax

The Trump administration reduced the corporate tax rate from 35% to 21%.  Joe Biden will increase the rate from 21% to 28%, an increase of 33.33%.  He also plans to create a new form of ‘alternative minimum tax’ on corporations who declare an income of more than $100 million according to their financial statements.  These corporations will have to pay a minimum tax of 15% even if they do not have to pay anything in compliance with the day’s tax code.

Under the Trump regime, you do not pay any tax on your estate if it’s worth less than $11.58 million. If you leave behind more than $11.58 million, you are taxed at a rate of 40%.   When you die, your heirs inherit your assets with a ‘stepped-up’ basis that equal its fair market value.  Only the value of the assets is taxed, not the appreciation of the assets.

Very Increased Estate Tax

Biden promises a substantial hike in estate tax.  The tax rate will increase to 45%, FOR EVERY ESTATE worth more than $3.5 million, and any appreciation in your assets would be fully taxable when you die. 

According to the Tax Policy Center, Biden would cost those who earn between $400,000 and $790,000 more than $9,000 per year.  If you earn more than $790,000, Biden will take a whopping 16% extra from your after-tax income, which amounts to an average cost of $265,000, on the back of Biden’s plan to double dividend and capital gain taxes for those who earn more than $1,000,000 per year, and the changed estate taxes.

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Increased Tax Credits And Refunds

Joe Biden peddled tax cuts for the poor as part of his campaign.  His suggestion is based on tax credits rather than tax cuts.

Tax credits differ from tax cuts.  Credits reduce tax liability on a dollar-for-dollar basis.  However, credits cost the government more. Those who do not have any tax liabilities will receive refunds. It means that the government will pay the poor during tax season.   Some of Biden’s proposed tax credits are listed below.
TAX CREDITTRUMPBIDEN
Child Tax CreditMaximum of $2,000 with only $1,000 refundableUp to $3,600 per child and fully refundable.
Child and Dependent Care CreditMaximum of $3,000 and not refundable.A maximum of $16,000 per family or $8,000 per individual and 50-percent of the credit is refundable.
New Home Buyers CreditNot ApplicableA maximum of $15,000.
Premium Tax Credit for State-Sponsored Health PlansExistingTo be expanded
Renters Tax CreditNot ApplicableWill reduce rent and utilities to no more than 30% of income
Earned Income Credit for the AgedExistingTo be expanded

According to the Forbes analysts, the tax credits will pay an extra $920 to families who earn between $50,000 and $90,000, and it will pay an additional $540 for those who earn between $88,000 and $160,000.  Forbes does not attribute these calculations to any individual or institution or substantiate it in any way.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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