Biden’s Tax Plan: What to Expect, What’s Proposed
Happy May, NextGen Family! We here at NextGen take pride in our financial prowess and would like to pass that same confidence to our Family! With Biden’s Tax Plan stepping towards enaction, we realize there might be some confusion on what to expect and what that might mean for your specific financial situation. Not to worry, the following information is from Investopedia, a financial advisory website full of advice and wisdom in the money-making world. According to Investopedia, here’s what to expect about Biden’s Tax Plan:
Tax Increases to Fund Infrastructure Program
Corporate tax proposals, included in the American Jobs Plan, the Administration’s infrastructure proposal, advance tax policies promoted throughout President Biden’s election campaign. The plan’s corporate tax policy goals include incentivizing job creation and investment in the U.S., stopping corporate profit-shifting to tax havens, and ensuring that large corporations pay their fair share of taxes.
The Biden Administration’s tax proposals would raise the corporate tax rate, impose new minimum taxes to prevent profitable U.S. businesses from escaping taxes through aggressive tax planning, repeal incentives for offshoring jobs, end preferences for the fossil-fuel industry, and strengthen corporate tax law enforcement by the Internal Revenue Service.
The corporate tax changes in the American Jobs Plan would raise tax revenue to help pay for the plan’s programs and investments in infrastructure that range from transportation and roads to broadband, water resources, healthcare facilities, education, and more. The estimated $2.3 trillion cost of the American Jobs Plan, the scope of the investments proposed to be made over 10 years, and the tax increases intended to support it have generated substantial policy and political debate.
Corporate Tax Changes
President Biden has proposed increasing the corporate income tax rate from the 21% level in effect since 2018 to 28%. A 28% tax rate would be significantly lower than the top corporate effective rate of 35% that applied between 1994 and 2017; nonetheless, the increase has drawn opposition and prompted suggestions for a compromise rate.
Reacting to an independent study finding that 91 of the Fortune 500 companies paid no U.S. corporate income tax in 2018, the Biden Administration has recommended a new corporate minimum tax of 15% on book income to prevent profitable companies avoiding U.S. taxation. The plan would repeal the current exemption for the first 10% return on foreign investment and would end the preferential tax rate of half the 21% domestic rate on the remainder of foreign profits. Thus, the U.S. would levy a minimum tax of 21% on multinational corporations’ income. This minimum tax would apply on a country-by-country basis to ensure that profits in tax havens are taxed. Deductions for the expenses of “offshoring” jobs would be eliminated, and tax credits would be granted for “onshoring” expenses.
A particular goal of the Biden plan is discouraging U.S. corporations from moving intangible assets and related profits abroad to controlled subsidiaries in countries with lower tax rates than those in the U.S. The plan’s 21% tax is particularly focused on global intangible low-taxed income, called “GILTI,” realized by shifting profits from easily moved assets, such as intellectual property rights, to low-tax jurisdictions. In addition, the Biden Administration is seeking through multilateral negotiations to have other countries join in establishing a global minimum tax to prevent countries
from seeking a competitive advantage by cutting corporate tax rates.
Individual Income Tax Proposals
In addition to the corporate tax changes in the American Jobs Act, the American Families Plan would make significant changes in the taxation of high-income taxpayers. The tax changes would help fund extensive programs to assist individual Americans. It would provide free education from pre-kindergarten for three-and four-year-old’s through two years of community college; assist historically Black Colleges and Universities (HBCUs), Tribal Colleges and Universities (TCUs), and institutions such as Hispanic-serving institutions, Asian American and Native American Pacific Islander-serving institutions, and other minority-serving institutions (MSIs); support paid family and medical leave, child nutrition, expanded childcare and the extension of currently enhanced Affordable Care Act subsidies. President Biden also has asked Congress to extend the expiring individual tax credits enacted in the American Rescue Plan.
The Biden proposals on individual taxation are designed to avoid increasing taxes on individuals with annual incomes below $400,000; to create benefits, largely in the form of refundable tax credits, such as the already enacted earned income and child tax credits, for the poor and those with low and moderate incomes; and to target any tax increases to the wealthy.
Tax Increases for the Wealthy
The Biden Administration’s proposed top income tax rate would increase the present law’s 37% to 39.6%. According to the White House, this increase will affect only the top 1% of taxpayers. The top rate on long-term capital gains would almost double, rising from 20% to 39.6%. In addition, the current net investment income surtax of 3.8% imposed on high-income taxpayers likely would continue to apply. Thus, the new top federal tax rate on capital gains would total 43.4%, almost double the present law top combined rate of 23.8%.
Biden Administration representatives indicate that only taxpayers whose incomes exceed $1 million would be subject to the higher tax on capital gains. However, it is not clear if the $1 million threshold would apply per individual taxpayer or return; on a per individual basis, the threshold for a joint return would be $2 million. When state tax laws are applied, the impact of this change will vary because some states have no income tax, some exclude capital gains or tax them below regular income tax rates, and some tax capital gains at their regular, ordinary-income tax rate. With the top state capital gains rate estimated at 5.2%, the combined average federal and state tax rate on capital gains for high-income taxpayers would be 48.6%.
The Biden capital gains proposal would almost double the federal tax currently imposed on long-term capital gains. However, the White House estimates that the increase in the capital gains tax rate will affect only 0.3% of taxpayers or approximately 500,000 households.
Opponents of the tax increase on capital gains warn that it could hurt the stock market. Other commentators discount this criticism. They believe that most U.S. shareholders will be unaffected by this change because approximately 75% of U.S. stock owners bought their shares through 401(k) plans, individual retirement accounts (IRAs), and other types of nontaxable accounts whose distributions ultimately are taxed at ordinary income rates.
Extension of Individual Tax Benefits
Several tax law changes in the American Rescue Plan Act, particularly the increase in certain individual tax credits, will expire at the end of 2021. The 2021 child tax credit of $3,600 per child under age 6 and $3,000 per child ages 6 through 17 is fully refundable and payable in advance. It will revert for 2022 to $2,000 per child under age 17 unless extended by legislation. In the American Families Plan, President Biden proposes extending the increase in the child tax credit through 2025 and make its full refundability and advance payment feature permanent.
Similarly, the child and dependent care tax credit are more generous for 2021 than for later years. For 2021, the maximum credit for one individual is $4,000 and $8,000 for two or more qualifying individuals and is refundable for some taxpayers. Unless amended in the interim, in 2022, the credit would become non-refundable, with maximums decreasing to $1,050 for one qualifying individual and $2,100 for two or more. Similarly, the earned income tax credit was increased and expanded for childless workers for 2021 by the American Rescue Plan Act. The American Families Plan would expand—and increases the allowances for—these tax credits permanent. These credits have been estimated to reduce childhood poverty by 50%.
The Biden Administration also proposes to make permanent the premium reductions for Affordable Care Act (ACA) health insurance coverage that were enacted in the American Rescue Plan and made effective for two years through premium tax credits.
Additional Proposals: Step-up in Basis, Carried Interest and Real Estate Exchanges
The American Families Plan includes additional tax proposals to counter “loopholes” that generally, but not exclusively, benefit higher-income individuals and were criticized by candidate Biden during his election campaign. The plan would repeal the “step-up in basis” rule that enables families to pass property down from one generation to another without paying any tax on the increases in the property’s value over time. However, the Biden Administration has announced that family-owned farms passed down to family members who will operate the property will be protected concerning this change. Additionally, gains will not be taxed when appreciated property is contributed to a charity.
The Biden plan also would close the “carried interest” loophole that partners employed by private equity and hedge funds, as well as other investment partnerships, claim allows them to
receive their partnership interests tax-free and to pay only capital gains tax when they dispose of their interests, thereby never paying ordinary income tax rates. In addition, the plan would limit the present law real estate tax break for “like-kind exchanges” that allow real estate investors to defer taxation when they exchange real property. Under the plan, the deferral would end for capital gains over $500,000.
In addition, the 3.8% Medicare tax on earnings which currently does not apply consistently to all high-income workers and investors, would be revised to apply more consistently to taxpayers making more than $400,000 annually. The Biden tax plan would also make permanent the 2021 rule that allows individuals’ deductions for excess business losses to offset their gross income and business profits plus $250,000 ($500,000 for joint returns).
The Bottom Line
The Biden Administration has outlined extensive revisions to the Internal Revenue Code with many details yet to be announced. Many of the proposals were introduced earlier during the President’s election campaign. The Administration projects that the tax law revisions and the return on the investments authorized in the American Jobs Plan and the American Families Plan will cover the cost of both plans over 15 years.
Biden Administration officials view their tax proposals as increasing fairness in the tax system by imposing less tax burden on low-income Americans while requiring the wealthy to pay a proportionately greater share. The White House emphasizes that its tax increases would affect only the top 1% to 2% of individual taxpayers.
NextGen is Here for You
We realize these are confusing times. With the tax deadline being pushed back, a new tax plan stepping towards enactment, and the world still reeling from COVID-19, NextGen will be here for you every step of the way. Our qualified and experienced team of tax strategists will do everything in their power to supply the most optimal returns for you and your small business. When it comes to your finances, you deserve only the best and brightest in the game. Lucky for you, they are all here at NextGen and await the moment when you call into our offices and ask about our services; from bookkeeping to tax strategy, NextGen is here for you. Give us a call, and let us make a tax plan for you!
Credit: https://www.investopedia.com/explaining-biden-s-tax-plan-5080766