Joe Biden has a double-digit lead in some polls and a number of Senate seats may turn blue as well, giving the Democrats a majority in Congress. If all that was to come to fruition, there would be major tax law changes.
Income Tax Changes
Biden prefers that increasing taxes on America’s richest workers. He’d do this by re-raising the top marginal income-tax bracket from 37% to 39.6%. If you recall, the TCJA lowered the top marginal bracket from 39.6% to 37% in 2018. For the 2020 tax year, this top marginal rate is applicable to earned income above $518,400 for single lers and over $622,050 for married couples ling jointly.
Biden is also in favor of increasing the capital gains tax on filers with incomes above $1 million. Presently, short-term capital gains are taxed at the ordinary income tax rate, whereas long-term gains are taxed at 0%, 15%, or 20%, depending on a ler’s income. The 20% rate is applicable to single and married couples ling jointly with earned income above $441,450 and $496,600,respectively, in the 2020 tax year. Biden’s proposal calls for filers with over $1 million in income to pay ordinary tax rates on all their gains, regardless of holding period, at a rate of 39.6%. So if you have appreciated stocks that you are likely to be selling in the next several years, sell them now. If you do, postpone capital losses until January so you can use them against gains occurring in higher-tax years.
Increase in the Corporate Tax Rate
The present corporate tax rate is 21%. Under the Biden tax plan, the corporate tax rate would be increased to 28%, which is still well below where it was during the Obama presidency.
Estate Tax Changes
2020 may be the last year to benefit from current estate tax exemptions. Biden’s tax platform appears to favor an increase in the so-called “wealth tax”, which can be achieved by a reduction in the estate tax exemption, as a smaller exemption leads to more estate tax.
The estate tax exemption’s current level is $11.58 million per individual. This means that an individual can give away USD $11.58 million ($23.16 million for married couples) to others during their lifetime or at death without being subject to gift or estate taxes. Without congressional action, these amounts are set to continue to increase with inflation through 2025, after which they will decrease back to about $5 million per individual. With congressional action, it’s likely that this “sunset” will come sooner, and that the exemption could be set even lower, under a Democratic administration or Congress.
While Biden has not committed to supporting all recommendations, the Biden-Sanders Unity Task Force has recommended returning the estate tax regime to the “historical norm.” This could mean restoring the exemption threshold to the 2009 level of $3.5 and it could also return to an estate tax rate increase back to the 45% rate in effect in 2009.
Estate Tax Planning Opportunities for Business Owners
This is a good time for clients with $11 million or more as individuals or over $23 million as a couple to consider gifting today by using their high exemption. If you do not use the current increased exemption you may lose it. Proactive gifting today using the current higher exemption by transferring the incremental amount out of your estate is a great way to transfer millions of dollars on an estate tax advantaged basis.
We recommend against procrastinating until the makeup of the Congress and White House is determined in November. There is no actual deadline to get started, but any gifts you want to make this year will need to be completed by December 31st. Gift planning is best done very carefully, and it can take time to organize things properly with an experienced tax attorney.
See also our post Covid 19 Gives Rise to Estate & Family Planning Opportunities for estate planning opportunities caused by Covid 19.