Let\u2019s start with a condensed summary of President-Elect Biden\u2019s tax plan:<\/p>\n
- \n
- Repeal the \u201cTax Cuts and Jobs Act\u201d passed in 2017.<\/li>\n
- Impose 12.4% Social Security payroll tax for wages above $400K<\/li>\n
- Increase the corporate income tax rate to 28%<\/li>\n
- Establish a corporate minimum tax on book income.<\/li>\n
- Double the tax rate on Global Intangible Low-Taxed Income, income from investments in foreign companies.\u00a0 The current rate is 21% which was included in the 2017 tax reform act.\u00a0 However, the current treatment of this tax gives flexibility to reduce the tax to 10.5% and if done correctly allows you to move your money as you see fit.\u00a0 You can leave your taxed earnings overseas or bring it to the United States with no additional impact.\u00a0 The GILTI is complex; however, the days of deferring foreign income have been over since the Tax Cuts and Jobs Act of 2017.\u00a0 Under the Biden administration we believe not only will the tax rate potentially double but the flexibility, referred to in the previous text, will be restricted.<\/li>\n
- Temporarily increase the Child Tax Credit and Dependent Credit.<\/li>\n
- These are only a few of the highlights.\u00a0 Let\u2019s get into additional details of a few important items President-Elect Joe Biden released included in his plan before the election. \u00a0It is important to expand upon a few key components of President-Elect Biden\u2019s tax plan, which he consistently referred to in the race for President.<\/li>\n<\/ul>\n
Highlights of Biden\u2019s tax Plan which affect payroll taxes, Individual Income taxes and Estate and Gift Taxes:<\/strong><\/h2>\n
The Biden plan imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees.\u00a0 The concern is this would create a gap in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 would not be taxed.\u00a0 We can not predict how this will affect the entire social security system and fund reserves.<\/p>\n
The Biden plan reverts the top individual income tax rate for taxable incomes above $400,000 from 37% under the current law to the pre-Tax Cuts and Jobs Act level of 39.6%.\u00a0 The Biden plan phases out the qualified business income deduction (Section 199A) for taxpayers with taxable income above $400,000.\u00a0 This could drastically affect many taxpayers who run qualified businesses and have benefited from the QBI deduction since it was passed in 2017.<\/p>\n
The Biden plan expands the \u201cChild and Dependent Care Tax Credit\u201d from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.<\/p>\n
The Biden plan reestablishes the First-Time Homebuyers\u2019 tax credit, which was originally created during the Great Recession of 2006 to help the housing market.\u00a0 Biden\u2019s homebuyers\u2019 credit would provide up to $15,000 for first-time homebuyers.<\/p>\n
The Biden plan expands the estate and gift tax by restoring the rate and exemption to 2009 levels and eliminates the long-standing step-up in basis at death rule.\u00a0 Many taxpayers will be advised to analyze their current Estate Plan and to make the necessary changes needed to minimize the Estate Tax.\u00a0 We advise seeking professional guidance, as each Estate Plan is unique.<\/p>\n
Highlights of Biden\u2019s tax plan which affect Business Tax:<\/h3>\n
The Biden Plan increases the corporate income tax rate from 21 percent to 28 percent.\u00a0 To expand on one of the bullet points above, the proposed plan creates a minimum tax on corporations with book profits of $100 million or higher.\u00a0 The minimum tax is structured as an alternative minimum tax.\u00a0 Corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax.\u00a0 The Biden proposed plan still allows for the inclusion of any net operating losses and foreign credits.<\/p>\n
The Biden plan establishes a \u201cmanufacturing communities tax credit\u201d to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure.\u00a0 The proposed plan expands several renewable energy-related tax credits.\u00a0 Conversely, the plan would end tax subsidies for fossil fuels.<\/p>\n
The Biden plan, in an effort \u201cto fight for workers by delivering on buy America \u2013 make it in America,\u201d \u00a0imposes a new 10 percent surtax on corporations that use offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.\u00a0 This surtax would raise the effective corporate tax rate on this activity up to 30.8%.<\/p>\n
There are many other changes; it is not practical to lay them all out in this brief update.\u00a0 Therefore, we have summarized the projected bottom-line effect of President-Elect Biden\u2019s plan.\u00a0 We pulled projections from several respected industry entities and compared the different projections to the \u201cTax Foundation General Equilibrium Model\u201d from October 2020.<\/p>\n
Economic Effect of Biden\u2019s tax plan:<\/h2>\n
\u201cThe Biden tax plan would reduce the economy\u2019s size by 1.62 percent in the long run.\u00a0 The plan would shrink the capital stock by approximately 3.75 percent and reduce the overall wage rate by a little over 1 percent, leading to about 542,000 fewer full-time equivalent jobs. \u00a0The model estimates, on a conventional basis, Biden\u2019s tax plan would increase federal tax revenue by $3.3 trillion dollars between 2021 and 2030 relative to the current law.\u201d<\/p>\n
1.\u00a0\u00a0\u00a0\u00a0\u00a0 Gross Domestic Product (GDP)\u00a0 (1.62%)<\/p>\n
2.\u00a0 \u00a0 \u00a0 Full-Time Equivalent Jobs (542,000)<\/p>\n
3.\u00a0\u00a0\u00a0\u00a0\u00a0 Wage Rate (1.15%)<\/p>\n
4.\u00a0\u00a0\u00a0\u00a0\u00a0 Apply a Social Security tax of 12.4% to earning >$400k\u00a0 (.18%)<\/p>\n
5.\u00a0\u00a0\u00a0\u00a0\u00a0 Restore estate and gift taxes to 2009 levels\u00a0 (.15%)<\/p>\n
6.\u00a0\u00a0\u00a0\u00a0\u00a0 Total Economic Effect of The Biden Tax Plan\u00a0 (1.62%)<\/p>\n
7.\u00a0\u00a0\u00a0\u00a0\u00a0 Conventional Tax revenue 2021-2030 (trillions)\u00a0 +$3.3<\/p>\n
8.\u00a0\u00a0\u00a0\u00a0\u00a0 Dynamic Tax Revenue 2021-2030(trillions)\u00a0 +$2.8<\/p>\n
(The difference in projected Conventional and Dynamic tax revenue (#7 & #8) is a result of the projected smaller economy.\u00a0 The tax base would shrink for payroll, individual income tax and business income tax.)<\/p>\n
*Source: Tax Foundation General Equilibrium Model, October 2020<\/p>\n
![\"estimated](\"https:\/\/walltitus.com\/wp-content\/uploads\/estimated-distributional-effect-of-Bidens-tax-plan.png\")
<\/p>\nPresident-elect Biden, according to the tax plan he released before the election, would raise taxes on labor income, investment income, and business income of those earning over $400,000.\u00a0 Additionally, Biden\u2019s Plan has proposed a variety of new tax credits or expansions to existing credits to help increase after-tax incomes for low earners.\u00a0 Biden\u2019s plan would raise about $3.3 trillion in tax revenue over the next decade on a conventional basis, $2.78 trillion after accounting for the reduction in the size of the U.S. economy.\u00a0 While taxpayers in the bottom four quintiles would see an increase in after-tax incomes in 2021, primarily due to the temporary CTC expansion, by 2030 the plan would lead to lower after-tax income for all income levels.<\/p>\n
At Wall Titus we are dedicated to our Client Family, providing current and ever-changing proposals, facts and modeling to stay at the forefront of our profession. \u00a0Please feel free to call if you have any specific questions or concerns regarding the proposed tax plan of President-Elect Biden.<\/p>\n
** The factual data and modeling comprised within this Tax Update was obtained from over 15 creditable professional industry sources. [i]<\/a><\/p>\n