The new year brings a new administration, and President Biden has an ambitious agenda. Per the Penn Wharton analysis of President Biden’s platform, the president has proposed increasing spending in various new and existing programs by $5.37 trillion between 2021 and 2030. In order to offset that spending, he also would like to raise revenue (taxes) by $3.375 trillion over that same period. One significant change to the business income tax provisions that Biden has suggested is to increase the flat income tax rate on C corporations to 28 percent from 21 percent. This represents half the decrease that was made under the Tax Cuts and Jobs Act (TCJA), which cut C corp rates from a top rate of 35 percent to a flat rate of 21 percent. In addition, the Biden plan could reverse the bonus depreciation and enhanced Internal Revenue Code Section 179 deductions provided for by the TCJA.
Several items on Biden’s tax wish list center on increasing individual taxes, and the main theme is that taxes for people who earn more than $400,000 could increase under Biden’s plan. Below is a summary of some changes that may affect contractors:
- The top tax rate could go up to 39.6 percent from 37 percent for individuals earning more than $400,000.
- Social Security taxes could increase for wage earners earning more than $400,000. Employees and employers each pay half of the 12.4 percent tax for Social Security (FICA). However, that tax doesn’t apply after the first $142,800 of earnings (for 2021). Biden’s plan proposes to leave the FICA tax the same except that it would kick back in for wages above $400,000. So, for example, if Biden’s plan was in place for 2021, wages between $142,800 and $400,000 wouldn’t be subject to FICA taxes, but wages greater than $400,000 would be subject to FICA taxes.
- Deduction of 20 percent of domestic qualified business income could be phased out for taxpayers with taxable income of more than $400,000.
- Restore phaseout of itemized deductions for adjusted gross incomes above $400,000. Limit overall benefit of itemized deductions to 28 percent in higher brackets. Biden also has proposed removing the $10,000 state and local tax deduction cap, so taxpayers may be able to deduct more of their state and local income taxes.
- Capital gains may be taxed at ordinary rates for taxpayers with more than $1 million in income.
Finally, Biden wants to make substantive changes to the estate and gift tax regime. His plan could change the lifetime gift/estate tax exemption to a lower “normalized amount” compared to the $11.7 million exemption that exists for 2021. Under Biden’s plan, the lifetime exemption could revert to the 2009 level of $3.5 million. As of now, most people aren’t subject to gift/estate tax, as the lifetime exemption is high enough to make most estates nontaxable. If the exemption comes down to $3.5 million per person, more people will end up paying gift/estate tax. Lastly, Biden’s proposal would eliminate the step-up of the tax basis of an asset upon death. The stepped-up basis allows heirs to pay reduced or, in many cases, no income tax when they sell inherited property, as the tax basis of the asset is stepped up to fair market value at the date of death. If Biden eliminates this step-up of tax basis, heirs in the future could potentially pay substantially more tax on their inheritance.
There’s a large list of tax-related items that Biden would like to see pushed through. The above is a summary of a few of these items. It remains to be seen how effective he will be in getting these changes implemented. However, with the Senate split evenly between Democrats and Republicans, prospects are better that President Biden may be able to get versions of these proposals enacted into law.