The Biden Administration is proposing Big changes with the coming expiration of the Tax Cuts and Jobs Act that is set to expire at the end of 2025.
These proposals still need to navigate Congress, but it is crucial for us to understand the key changes being considered.
These proposals are primarily directed at high income earners and corporate America, but the underlying affect will impact everyone to some degree, regardless of your tax bracket.
Listed below are 7 key proposed tax changes to the people in this country we call TAXPAYERS:
1. Capital gains tax increase
The current top capital gains tax rate is 20%, but the Biden plan would nearly double that to 39.6% for individuals earning more than $1 million annually. There’s also a separate proposal for a 44.6% capital gains rate that would apply to those with high net investment and taxable income.
2. Top marginal income tax rate increase
The top marginal income tax rate would increase from 37% to 39.6% for individuals earning over $400,000.
3. Medicare tax increase (or the Net Investment Income Tax (NIIT))
The Medicare tax rate would rise from 3.8% to 5% for individuals earning more than $400,000 per year. Current law lets certain wealthy business owners avoid Medicare taxes on some of the profits they get from pass-through businesses. This closes the loophole and raises Medicare tax rates on earned and unearned income for those with incomes over $400,000.
4. Corporate tax increases
On the business side, the corporate income tax rate would jump from 21% to 28%. There would also be an expansion of the $1 million cap on deducting employee compensation to apply to all employees of public and private C corporations. Additionally, the corporate alternative minimum tax would increase from 15% to 21%.
5. Repeal of like-kind exchanges
The Biden plan proposes repealing Section 1031 of the tax code, which currently allows for tax-deferred “like-kind exchanges” of real estate. This would be a major change for clients involved in real estate investing and development.
6. Elimination of stepped-up basis
As mentioned earlier, the Biden plan aims to largely eliminate the “stepped-up basis” provision, where capital gains are currently not taxed when assets are transferred at death or by gift. This would be a major shift, potentially subjecting more clients’ wealth transfers to capital gains taxes.
7. Increased limit on deducting employee compensation
The $1 million cap on deducting employee compensation would be expanded to apply to all employees of publicly and privately held C corporations. This change could reduce the after-tax income for business owner clients.
I don’t mean to scare anyone, but we need to be aware of what is possible and how Washington could affect us. This brief synopsis does not represent new law, but it could be devastating to our economy and more importantly to our check book. Your vote does matter.
-Gary Gainspoletti, CPA, CFP®