Knowledge and Insights

Successful tax planning does not just require arranging one’s affairs to take advantage of current tax laws. It also requires anticipating changes that may occur so that you do not get caught with a plan that just does not work.

The election is now behind us and we know that Democrats control the White House, House of Representatives and Senate. Although tax law changes are always difficult to pass through Congress, with control of both the House and the Senate it is more likely that some, if not many, aspects of President Biden’s tax policy may be enacted. Taxpayers may want act now in anticipation of some of the changes that may be on the horizon.

Following is a summary of some of the more significant tax changes that are included in President Biden’s proposed tax policy:

1. Increasing individual tax rates for people with income above $400,000. The highest federal tax rate will increase from 37% to 39.6%
2. Limit the tax benefit of itemized deduction to a maximum of 28%. Therefore, even though income may be subject to tax at as high as 39.6%, itemized deductions will only reduce taxes by no more than 28%.
3. Bring back the phase-out of itemized deductions for individuals with income above certain amounts.
4. Eliminate the $10,000 limitation on state and local taxes.
5. Increase the tax rate on long-term capital gains to 39.6% for individuals with income above $1 million. When you add the 3.8% net investment income tax, the maximum effective rate on long-term capital gains could be as high as 43.4%.
6. Assess Social Security tax on wages and self-employment income above $400,000. This would create a “donut hole” where tax will be due on income up to $137,700, then it will stop until $400,000 and then tax will start again.
7. Eliminate the step-up to fair market value for inherited property.
8. Reduce life-time exemption for estate and gift taxes from the $11.58 million to $3.5 million and increase the tax rate from 40% to 45%.
9. Phase out qualified business income deduction for those earning over $400,000.
10. Eliminate the $25,000 exemption from the passive loss rules for rental real estate.
11. Eliminate section 1031 like-kind exchanges.
12. Eliminate rules for faster depreciation write-offs for certain real property.
13. Eliminate the qualified business income deduction for rental real estate activities.
14. Increase the refundable child tax credit to $4,000 for one qualifying child and $8,000 for two or more qualifying children. The credit would be phased out at incomes between $125,000 and $400,000.
15. Establish a new tax credit of up to $15,000 for eligible first-time homebuyers and would be collected when the home is purchased rather than as part of the income tax return.
16. Establish a new refundable tax credit for low-income renters intended to hold rent and utility payments to 30% of monthly income.
17. Increase the corporate tax rate from a flat 21% to 28%. Also institute a new 15% minimum tax calculated on reported book net income on corporations with at least $100 million in annual income.

Mercadien’s Tax Services Group can help you adjust your tax plan if needed, and plan accordingly should the above changes be enacted. If you have any questions about your tax plan or how the proposed legislation may impact you, contact me at [email protected] or 609-689-9700.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.