Now that the results of the presidential election are in and former Vice-President Joe Biden has become President-elect Biden, it is important to remember the tax policy changes for personal income taxes announced by Mr. Biden during his campaign that he would propose if elected. As we review three of these changes, keep in mind that the likelihood of these proposed changes being enacted into law will in large part depend on the results of the January, 2021 runoffs in the two Georgia U. S. Senate races. If the Republican nominee wins at least one of these two seats, the Republican party will maintain control of the U. S. Senate and the likelihood of these changes being enacted effective for 2021 will decrease significantly. The lingering effects of the COVID-19 pandemic on the US economy and the need for additional fiscal stimulus could also impact the timing and nature of any tax law changes.
Change #1- Increases in Income Tax Rates on Ordinary Income
During his campaign, President-elect Biden announced plans to increase the personal income tax rates for the “wealthy” by increasing the marginal income tax rates to 39.6% for married taxpayers who file joint income tax returns and whose taxable income is in excess of $400,000. Under present tax laws, the taxable income of joint married taxpayers in excess of $400,000 is taxed at rates of 32%, 35% or 37%. See Table 1 at the end of this article for a chart that shows the 2020 income tax rates and the possible 2021 income tax rates if this proposed increase in the marginal income tax rates becomes effective in 2021.(1)
Change #2- Income Tax Rate Changes for Qualified Dividends and Capital Gains
Another policy change that President-elect Biden announced he would pursue is removal of the tax rate cap of 20% for qualified dividends and capital gains for taxpayers with taxable income in excess of $1,000,000. Under present law, qualified dividends and long term capital gains are taxed at rates of 0%, 15% or 20% depending on the taxpayer’s taxable income. For 2020, capital gains of married taxpayers who file joint returns and whose taxable income exceeds $496,600 is taxed at 20%. Both types of income (qualified dividends and capital gains) are subject to additional taxation at 3.8% (Net Investment Income Tax, or NIIT). Mr. Biden has not announced any plans to repeal or modify the NIIT, which was originally enacted to help pay for the health care provisions of the Affordable Care Act.
In addition, Mr. Biden has proposed a limitation on itemized deductions for taxpayers with taxable income taxed at the 28% and higher brackets. As noted in Table 1, if this change had been in effect for 2020, it would apply to married taxpayers who file joint returns with taxable income in excess of $326,600.
Change #3- Increase in Earned Income Subject to Social Security Taxes
President-elect Biden has announced his intention to propose a change in the amount of earned income subject to Social Security taxes so that earned income of taxpayers in excess of $400,000 will become subject to Social Security taxes. Under present law, earned income up to $137,700 is subject to Social Security taxes(2). For individuals who are self-employed, the Social Security tax rate is 12.4% with a deduction for half the Social Security taxes paid. For employees, employers pay 6.2% and employees pay 6.2%. Social Security taxes are payable by each taxpayer (and his or her employer) on a per individual basis regardless of the tax filing status of the taxpayer. In addition, earned income is subject to a Medicare tax of 1.45% without any limit. Mr. Biden has not announced any plans to change the present Medicare tax.
In conclusion, individuals, particularly the “wealthy”, should monitor closely the political intrigue that will ensue over the next few months in order to determine if their personal income tax planning will need to be changed for 2021 and future years.
If you have questions about how the proposed tax policy changes will affect your tax planning if enacted by Congress, Dickinson Wright attorneys are here to help. For more information, call Ralph Z. Levy Jr., Esq., at 615-620-1733 in the Firm’s Nashville, TN office or any other Dickinson Wright PLLC attorney who is part of the Firm’s Tax Practice Group.
| Table 1- Possible Tax Rate Changes | ||||||||
| 2020 Tax Rates (Joint Married Taxpayers) | Potential 2021 Tax Rates (Biden Plan) | |||||||
| $0 – $19,750 | 10% | 0 | $0 – $19,750 | 10% | 0 | |||
| 19,751 – 80,250 | 12% | $ 1,975.00 | 19,751 – 80,250 | 12% | $ 1,975.00 | |||
| 80,251 – 171,050 | 22% | $ 9,235.00 | 80,251 – 171,050 | 22% | $ 9,235.00 | |||
| 171,051 – 326,600 | 24% | $29,211.00 | 171,051 – 326,600 | 24% | $29,211.00 | |||
| 326,601 – 414,700 | 32% | $66,543.00 | 326,601 – 400,000 | 32% | $66,543.00 | |||
| 414,701 – 622,050 | 35% | $94,735.00 | over $400,000 | 39.6% | $90,031.00 | |||
| over $622,050 | 37% | $167,307.50 | ||||||
(1) The tax rates and brackets shown in Table 1 are in effect in 2020 for married taxpayers who file joint income tax returns. The seven income tax brackets shown in Table 1 do not reflect the increases to the tax brackets that will become effective in 2021 based on annual inflation adjustments. For example, married taxpayers who file joint income tax returns and who have 2021 taxable income in excess of $628,300 will be taxed at the highest 37% rate. This is a $6,250 increase from the $622,050 bracket amount shown in Table 1.
(2) Based on an annual inflation adjustment, 2021 earned income up to $142,800 will be subject to Social Security taxes.