One of the most frequently asked questions clients are asking these days is whether tax rates will go up in 2021. The answer, of course, is it depends on who wins the election and ends up controlling Congress. But what we do know is where the two major presidential candidates stand on the issue of taxes and tax rates. The current administration passed the Tax Cuts and Jobs Act (TCJA) in December 2017 to reduce taxes on corporations and individuals, and the President has stated he plans to cut taxes further if he is reelected. But what about taxes under a Biden presidency? Will rates increase, decrease or perhaps stay the same?
Democratic candidate Joe Biden has proposed a return to the top tax rates in effect before the TCJA on ordinary income for taxpayers making more than $400,000 per year. This would increase the top tax rate from 37% to 39.6%. Among other things, Joe Biden also would phase out itemized deductions and the section 199A qualified business income deduction for taxpayers making more than $400,000 per year. These changes would affect roughly the top 1% of taxpayers.
Another proposal coming from the Biden campaign is the call for an increase in the capital gain and qualified dividend income tax rates for taxpayers with income over $1 million. This would increase the top tax rate on these items from 20% to 39.6%, not including the 3.8% net investment income surcharge. These changes would affect roughly 0.1% of taxpayers.
A Biden victory also could lead to an increase in the Social Security taxable wage base. The current OASDI tax rate for wages paid in 2020 is 6.2%, subject to a cap of $137,700 in taxable wages. Thus, an individual taxpayer earning more than $137,700 would contribute a maximum of $8,537 to the OASDI program in 2020.
Biden proposes to lift this cap for taxpayers with incomes over $400,000, though it’s unclear whether the Social Security employment tax would apply only to wage income over $400,000, or whether it also would apply to wage income between $137,700 and $400,000. Currently, about 6% of workers earn in excess of $137,700 and about 1% of wage earners exceed $400,000 annually.
The passage of the TCJA reduced the top corporate tax rates from a graduated maximum of 35% to a flat rate of 21%. Biden would increase this rate to 28%, and would impose a new 15% minimum tax on companies that report more than $100 million in global book income. He also proposes a 10% offshoring tax on any profits made from the production by a U.S company overseas for sale on American soil; this would increase the effective tax rate on such income to 30.8%.
Whether any of Biden’s tax proposals become law depends on whether he wins the election and whether Democrats win enough seats to take control of the Senate (the House is widely assumed to remain under Democratic control). If Biden wins and Republicans keep control of the Senate, then Biden’s agenda will be constrained and we are unlikely to see dramatic change in tax policy. If, however, Biden wins and Democrats take control of the Senate, then Biden will have a greater opportunity to pursue his progressive tax agenda.
Should you take action now? Well, that depends on your individual tax profile and expectations regarding the election. There are many permutations, as touched upon above, and planning now for different scenarios certainly makes sense. But remember, these proposals are just that – proposals, and there will be time after the election and before year-end to execute on any election-year tax planning.