The Biden Tax Proposal and What it May Mean to YouSubmitted by Ascend Planning & Consulting LLC. on May 12th, 2021
President Biden’s proposed tax platform could lead to major changes to existing federal tax rules applicable to many individuals and businesses. The proposed plan would place more federal taxes on high-income individuals and businesses. There could be sweeping changes aimed at many federal tax categories. These changes may impact Social Security tax, individual income tax, business and investment tax, capital gain tax, and federal and gift tax exemptions.
Although these revisions are proposed and not yet enacted, it is possible they could be effective much sooner than expected. It may benefit you to know the existing tax rules and what is proposed in order to better plan, prepare and act on strategies that are based on income, retirement, estate and gift tax.
Key proposed points:
- Increase the top ordinary income tax rate for income over $400,000.
- Increase the long-term capital gains rate for earners over $1,000,000.
- Eliminate step-up in basis for capital gains taxation.
- Replace deductions for contributions to IRAs, 401(k)s, and similar retirement accounts with a flat 26% credit.
Personal income tax changes
The proposal increases long-term capital gains rates back to ordinary income above $1,000,000.
Estate and transfer taxes
Federal estate and gift tax changes
Under the proposed plan, the step-up in basis for capital gain assets would be eliminated. This applies to assets subject to capital gain treatment. Low basis assets passed to heirs upon death could be subject to substantial capital gains taxation. Under the current rules, there is a step-up in basis on certain capital assets passing to heirs on death.
Deductions for IRAs and 401(k)s
As proposed, a flat 26% tax credit would replace deductions on IRA contributions. Currently, IRAs are deductible depending on income, and whether or not the individual is a participant in a qualified plan through an employer. This also applies to 401(k)s and other qualified plans.
Additional proposed personal income tax changes There are numerous proposed changes to the current income tax rates, deductions and credits at the individual taxpayer level, including:
- The maximum amount of itemized deductions would be no more than 28% for those earning over $400,000.
- The earned income tax credit would be expanded for certain workers 65 or older.
- The Child and Dependent Care Tax Credit would be increased to $8,000 ($16,000 for multiple dependents) and increase maximum reimbursement rate from 35% to 50%.
- There would be renewable energy-related tax credits for individuals.
- The first-time homebuyer credit would be restored with a maximum of $15,000. Under the current rules, there is no first-time homebuyer credit.
- Tax-deferred exchanges performed under IRC 1031 would no longer be available with the proposal. Similar to IRC 1035 where there can be an exchange of one annuity for another annuity without recognition of gain, IRC 1031 applies to like-kind real estate when one property is exchanged for another held for business or investment. TCJA limited 1031 to real estate.