As Biden's new administration announces candidates for key cabinet positions, there is much speculation about what certain policy initiatives, including tax reform, will look like under the new president.
During the 2020 presidential campaign, the Biden team made a few things clear: He would work to withdraw certain elements of the Tax Cut and Employment Act (TCJA) of 2017 that he and other Democratic Party prominent figures see as tax breaks and loopholes for businesses and wealthy individuals; and that it would work to spur economic growth with incentives designed to boost US manufacturing and support the clean energy sector.
Understanding that there is a huge difference between political positions and the ability and willingness of an elected party to make the proposed changes, below are some key components of Biden's proposed reforms of tax law and the way businesses and individuals do it Should proceed, examine approach planning for these changes.
The changing landscape for corporate filing
The biggest changes in the TCJA, hailed by Republican supporters and derided by critics, were changes that significantly reduced the tax burden on US-based companies. It seems that the first on the list of possible reforms of the Biden era are efforts to withdraw these tax breaks. Biden's team has stated that it intends to raise the standard corporate tax rate by seven points to the pre-TCJA level of 28%. In addition, the TCJA removed the alternative minimum tax for companies that Biden was able to reintroduce and required companies with incomes of $ 100 million or more to pay the standard rate or a minimum tax of 15%, whichever is greater .
Biden has also proposed changes to Qualified Business Income (QBI) deductions. Under current law, which expires on December 31, 2025, non-C-corporation taxpayers are allowed to deduct 20% of QBI from either pass-through companies or qualifying real estate investment trusts. President-elect Biden could phase out those QBI deductions for those making more than $ 400,000.
While some of Biden's tax positions could potentially increase the corporate tax burden, it is also proposed to expand tax breaks. For example, Biden intends to make changes to New Markets Tax Credits (NMTC). Currently, these loans for qualifying stakes in low-income communities are capped at $ 5 billion and cannot be granted after this year. Biden could expand NMTC and make it a permanent program that creates a mutually beneficial situation for businesses and communities.
Biden would also expand renewable energy tax credits, including those for carbon capture, use and storage. Energy efficiency in residential areas; and restoration of Energy Investment Tax Credit (ITC) and Electric Vehicle Tax Credit.
Individual tax planning
The largest proposed changes in individual tax rates are aimed at higher tier of wealthy individuals. For example, Biden has proposed a 2.6% increase in the tax rate that will return to the pre-TCJA tax rate of 29.6% for those earning more than $ 400,000.
Additionally, the TCJA increased the inheritance tax exemption to $ 11.58 million (in 2020), allowing the base for the transfer of valuable property upon death to be increased. Biden would reintroduce exemptions before TCJA and remove the top-up base. As a result, individuals may want to consider options to maximize real estate exclusions for life. Biden could also try to eliminate breaks for long-term capital gains and dividends for income above $ 1 million in lieu of introducing standard tax rates.
The new administration could also seek to impose a Social Security wage tax of 12.4% on incomes over $ 400,000, split evenly between employers and employees.
Increased benefits and breaks could include increasing the child and dependent care tax credit to a maximum of $ 8,000, increasing the child tax credit to $ 3,000 while adding a bonus credit of $ 600 for children under the age of 6, and the first time buyer tax credit restore that provides Up to $ 15,000 for first-time buyers.
International tax planning
For those involved in international business transactions, tax liability may be affected by a new administration as President-elect Biden has proposed introducing tax breaks and penalties for income and business transactions overseas.
In particular, there are three areas that should be looked at when assessing how a Biden government can affect international tax planning. First, there could be changes in global low intangible tax income (GILTI). Currently, US multinational corporations pay a foreign tax rate between 10.5% and 13.125% for GILTI, with an increase to 16.406% planned in 2026. However, under a Biden government, the tax rate could be doubled to 21% and a minimum tax assessed by country.
Another area that could be affected is offshoring. There are currently tax deductions for companies that produce domestically and sell abroad. A Biden government could create a 10% surcharge tax on imported goods and a 10% tax credit on US-made goods to create jobs in manufacturing.
Eventually, the incoming Biden government could influence the repatriation. The current approach is that domestic corporations can defer paying US income tax on profits from offshore subsidiaries until those profits are repaid. This expires on December 25, 2025. However, President-elect Biden could create provisions that would allow companies to return tax breaks when sending jobs overseas.
Final thoughts
Ultimately, an in-depth administration's plans to make changes are limited by bipartisan concerns. The Republican Party has fought hard to implement the changes in the TCJA, and it will need full democratic support in both Houses of Congress to push through the tax reform. The Democrats retained a narrow majority in the House of Representatives, and with the groundbreaking Senate vote going to Vice President Harris, it is likely that the Biden administration will be able to make some changes. The biggest open question will be how high is tax reform on their priority list.
Ultimately, it remains to be seen what will happen to individual, corporate and international taxes when the Biden government takes over next year. However, it is never too early to begin planning for the potential impact of the new administration.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Sanjay Agarwal is the head of the tax practice at MGO.