Now that presumed U.S. President-Elect Joe Biden has been named, many people may be wondering what his tax plan looks like and whether there is anything they can do now to prepare for changes that may be coming. Here are some important highlights of his plan:
Business Tax
- Increases the corporate tax rate from 21% to 28% and establishes a corporate minimum tax of 15% for corporations with $100 million or more in book profits.
- Creates a 10% “Made in America” tax credit for companies that create jobs for American workers. This credit would be available for revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or service jobs back to the U.S.
- Expands the New Markets Tax Credit and makes it permanent.
- Expands several renewable energy related tax credits.
- Doubles the tax rate on Global Intangible Low Tax Income earned by foreign subsidiaries of U.S. firms from 10.5% to 21% as well as other mechanical calculation changes.
- Imposes a new 10% surtax on corporations that offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the U.S. market.
- Eliminates or modifies certain real estate industry tax provisions including Opportunity Zone and Section 1031 exchanges.
Planning Considerations
- Consider accelerating income and deferring deductions where possible.
- Accelerate M&A transactions by sellers with major capital gains.
- Consider and model impacts of offshore activity and take into account possible new penalties and/or credits in locating manufacturing activities within or outside the U.S.
- Review global tax plan including transfer pricing and structuring of foreign subsidiaries.
Payroll Tax
- Imposes a 12.4% social security payroll tax on income earned above $400,000. Such tax would be split evenly between the employer and employees. Wages between $137,700, the current wage cap, and $400,000 would not be taxed.
Planning Consideration
- The increase to social security taxes on wages and self-employment income could make an S corporation a more attractive entity structure than an LLC or partnership since income from the LLC/partnership is considered self-employment income for certain partners.
Individual Tax
- Repeals components of the Tax Cuts and Jobs Act for higher income earners (those with taxable income over $400,000), including the 20% Qualified Business Income deduction available for owners of qualified partnerships, LLCs and S corporations.
- Increases the top individual income tax rate from 37% to 39.6% and decreases the income bracket at which such rate is imposed to $400,000.
- Eliminates the preferential tax rate on long-term capital gains and qualified dividends for taxpayers earning more than $1 million.
- Limits the tax benefit of itemized deductions to 28% of value and restores the Pease Limitation for those earning more than $400,000.
- Expands the Earned Income Tax Credit and Dependent Care Tax Credit and includes a temporary increase to the Child Tax Credit for 2021 which would only last “as long as economic conditions require.”
- Reestablishes the First-Time Homebuyer Tax Credit. The credit would provide up to $15,000 for first-time homebuyers.
- Includes tax-free student loan forgiveness.
Planning Considerations
- Consider accelerating income and deferring deductions.
- Consider Roth IRA conversions.
- Accelerate capital gain transactions if possible. Elect out of the installment sales method if a transaction will straddle multiple years.
Estate Tax
- Reduces the estate and gift tax exemption from $11.58 million to pre-tax reform levels (around $5 million).
- Eliminates the basis step-up (to fair market value) a person receives when property is inherited. It is not known if his plan would require an heir to simply carry-over the decedent’s basis in property, deferring the tax until the capital gain is realized or if the tax would be imposed on unrealized capital gains at the time of inheritance.
- Does not support a wealth tax.
Planning Considerations
- Assess overall net worth and consider substantial gifting to maximize utilization of the current exemption levels.
- Consider how you may be able to utilize trusts, such as a Spousal Lifetime Access Trust, to provide long-term flexibility.
- Consider creating taxable transactions with non-grantor trusts to take advantage of current lower capital gain tax rates while moving growth assets out of your estate.
Contact Us
It is too soon to tell what components of the presumed President-Elect Biden’s tax agenda will pass as actual legislation, or what the details of such legislation will be. Clayton & McKervey will continue to monitor the situation and keep you informed. For additional information, call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.
