Less than 100 days into President Biden’s presidential term, he has proposed a sweeping tax and spending policy. While this plan has yet to be debated or passed, it does give a good indication of what impact the plan may have on U.S. businesses and individuals.
Corporate & Personal Tax Rates
As a reminder, under the Tax Cuts and Jobs Act of 2017 (TCJA), personal income tax rates were lowered across all income levels while deductions were capped or eliminated. Additionally, the corporate income tax rate was reduced from 35% to 21%. Biden’s proposal aims to increase the corporate rate to 28%. He also proposes to increase the highest marginal income tax rate back to 39.6%. Under the proposal, the more favorable capital gains rate (currently 20% for higher income levels) will not be available for individuals who earn more than $1 million. For individuals who itemize deductions such as mortgage interest, real estate taxes, or medical expenses, they will only be able reduce taxable income with these deductions by 28%, instead of at their marginal rate.
Alternative Minimum Tax
Prior to the TCJA, the U.S. had an Alternative Minimum Tax (AMT) imposed on corporations. The AMT was passed in response to public outcry in the 1980s because many corporations did not pay any income tax due to loopholes and creative planning. While the TCJA eliminated the AMT, the pendulum may swing back towards reinstating the AMT. If passed as proposed, a 15% AMT will be levied on corporations that earn more than $100 million globally.
Another major change would be for what is widely referred to as “1031 Exchanges.” At a high level, Internal Revenue Section 1031 provides that no gain is recognized when real property used in a trade or business is exchanged for another property similar in nature. Under Biden’s policy, 1031 exchanges will require recognition of gain if the taxpayer earns more than $400,000 on a transaction.
Federal Estate Taxes
In the context of trusts and estates, currently the Federal Estate Tax is not imposed unless the value of an individual’s net estate (plus taxable lifetime gifts) exceeds $11.7 million ($23.4 million for married couples). Those who inherit property receive a “step up” in basis equal to the property’s fair market value on the date of death. For example, if an individual purchased stock for $100 prior to his or her death, and on the date of their death the stock is valued at $200, the beneficiary’s basis in the stock would be $200, not $100. As of now, the Biden administration is likely to try reducing or eliminating the tax benefit related to the basis step up for inherited property. This could result in death, or the later sale of inherited property, being a “taxable event” where capital gains taxes are due. Additionally, the administration intends to decrease the Federal Estate Tax threshold significantly, perhaps to $3.5 million per individual ($7 million for married couples), with only $1 million of Gift Tax exemption allowed.
As a result of the possible decrease in the amount of an Estate that can be exempt from Federal Estate Tax, many wealthier individuals are making gifts now while the gift and estate tax credit equivalent exceeds $11 million (“use it or lose it”). Those gifts are frequently made to trusts including SLATs (Spousal Lifetime Access Trusts) under which the donor spouse has access to the funds if needed. Others are considering intra-family loans or GRATs (Grantor Retained Annuity Trusts) because of the current low-interest rate environment.
Manufacturing Communities Tax Credit
President Biden’s policy also proposes a new tax credit: the Manufacturing Communities Tax Credit. Similar to Pennsylvania’s Opportunity Zone Tax Credit, the Manufacturing Communities Tax Credit aims at revitalizing economies that have been negatively impacted by the closure of manufacturing plants and incentivizes creating new employment opportunities.