Federal tax changes we may see from President-elect Biden for 2021

With the 2020 general election results mostly finalized, attention turns to what federal tax changes could be implemented under the Biden administration. While Democrats gained control of the White House and House of Representatives, control of the Senate hinged on Georgia’s runoff elections in early January. Even with a narrow Democratic majority, passing significant tax reform remains uncertain due to political dynamics and the ongoing economic impact of COVID-19.

Below is a summary of the most prominent proposals in the Biden tax plan, including both individual and corporate provisions.

Individual Tax Proposals

Higher Maximum Individual Tax Rate

Top rate would increase from 37% to 39.6%.
Applies to those earning over $400,000 (specific income definition unclear).

Limit on Tax Savings from Itemized Deductions

Limits tax benefit of deductions to 28% for higher earners.
Reinstates phase-out of itemized deductions for high-income taxpayers.
Likely supports repeal of the $10,000 SALT deduction cap.

Higher Tax Rate on Long-Term Capital Gains

For income above $1 million, long-term capital gains and qualified dividends would be taxed at 39.6% (plus 3.8% NIIT).
Maximum effective rate: 43.4% (up from 23.8%).

Increased Social Security Tax for High-Income Individuals

Restarts 12.4% Social Security tax for income above $400,000.
Creates a “donut hole” structure between the current cap and $400,000.

Elimination of Step-Up in Basis for Inherited Assets

Would remove step-up in basis at death.
Gains would be taxed on inherited assets as if sold at death.

Elimination of Certain Real Estate Tax Breaks

Repeals the $25,000 rental loss allowance for active participants.
Ends 1031 like-kind exchanges for real property.
Eliminates QBI deduction and accelerated depreciation for certain real estate activities.

Phaseout of QBI Deduction

The 20% deduction under Section 199A would phase out for incomes over $400,000.

Enhanced Child and Dependent Care Tax Credits

Child tax credit increased to $3,000 ($3,600 for children under 6), fully refundable.
Dependent care credit increased to $8,000 for one child, $16,000 for two or more; also fully refundable.

Health Insurance Credits

Ensures no household spends more than 8.5% of income on premiums.
Refundable credits would reduce cost for middle-income families.

First-Time Homebuyer Credit

Up to $15,000 refundable credit at time of purchase.

Equalized Retirement Plan Contribution Benefits

Would revise rules to provide greater benefit for lower-income earners, reducing current skew toward high earners.

Corporate Tax Proposals

Higher Corporate Tax Rate

Increase from 21% to 28%.

Minimum Tax on Book Income

15% minimum tax on book income for corporations earning $100 million or more.

International Tax Changes

GILTI inclusion taxed at 21% on a country-by-country basis.
Eliminates QBAI exemption.
Adds penalties for offshoring jobs and new credits for domestic production (“Made in America” credit).

Financial Risk Fee

Imposed on financial institutions with more than $50 billion in assets.

Green Energy & Environmental Proposals

Reinstates or expands tax incentives for energy-efficient commercial and residential investments.
Reintroduces and expands electric vehicle credits.
Eliminates deductions for fossil fuel development costs.

Conclusion

While these proposals outline the Biden administration’s tax agenda, implementation depends on several factors:

Senate control and use of budget reconciliation.
Political appetite for tax increases in a post-COVID economy.
Prioritization of public health, economic recovery, and bipartisanship.

Businesses and individuals should remain vigilant, as even incremental tax changes could significantly impact planning strategies. We will continue monitoring legislative developments and provide updates as more information becomes available.

Questions about how these proposals could affect you or your business?
Contact our office to schedule a consultation.