With uncertainty around the November elections, investors are asking about policy changes that may be introduced under a new administration and a Democratic-controlled Congress.
A look at tax proposals being offered by Democratic candidate Joe Biden could be a place to start.
The tax plan is a collection of various high-level proposals, subject to modification and clarification in the event these proposals became part of formal legislation in the future.
Key points of the proposed Joe Biden tax plan*
- Increase in the corporate tax rate from 21% to 28%
- Other tax increases include a minimum 15% tax rate on domestic and foreign income, an increase on the global intangible low-tax income (GILTI) tax rate to 21% (from current 10.5%), and a 10% surtax on income from goods and services sold from a foreign subsidiary
- Introduce a “Made in America” tax credit
- Eliminate the 20% deduction for qualified business income (QBI) for those reporting more than $400,000 in income
- Restore the 39.6% tax rate for higher-income taxpayers (roughly defined as those earning more than $400,000 ). It is not clear whether that income threshold would apply to individuals, married couples, or both.
- Tax long-term capital gains and qualified dividends as ordinary income (39.6% under the Biden plan) for those reporting more than $1 million in income
- Elimination of 1031 exchanges for those reporting more than $400,000 in income
- The value of itemized deductions would be capped at the 28% tax bracket
- Phaseouts of deductions for those with more than $400,000 in income would be restored
- The limit restricting deduction of state and local taxes (SALT) to $10,000 total would be repealed
- Increases in the Child Tax Credit (CTC)and Child and Dependent Care Credit
- New first-time homebuyer tax credit (up to $15,000) and caregiver tax credit (up to $5,000)
- Subject earnings above $400,000 to the Social Security payroll tax of 12.4%
- Limit stepped-up cost basis on certain inherited assets at death. Specific details are not clear
Other potential, tax-related proposals that could emerge
Based on research of tax-related policies proposed by the previous administration when Joe Biden was vice president, here are additional provisions that may be introduced under a Biden administration.†
- Reduce the lifetime estate and gift tax exclusions. The last budget proposed by the Obama administration called for restoring 2009 levels of $3.5 million for estates and $1 million for gifts
- Modify grantor trust rules, apply a minimum term of 10 years for grantor retained annuity trusts (GRATs), require a taxable gift when funding a GRAT
- Disallow the use of dynasty trusts
- Enact a “fair share tax” on those reporting more than $1 million in income. The tax would ensure those taxpayers would not pay income tax less than 30% of their adjusted gross income (AGI), less a credit for charitable contributions
- Implement a financial services institution fee of 0.07% applied on certain liabilities of banks and non-bank financial institutions such as insurance companies and asset managers with more than $50 billion in assets
Revisit tax planning
Despite uncertainty around tax rates and what tax changes may be introduced, it may be an appropriate time to meet with a financial advisor or tax professional and review current tax plans. Investors may consider making changes to their plans or take advantage of certain strategies before year-end.
*Sources: Biden-Harris campaign, A tale of two tax policies. Tax Foundation, Details and Analysis of Democratic Presidential Nominee Joe Biden’s Tax Proposals. Committee for a Responsible Federal Budget, Understanding Joe Biden's 2020 Tax Plan.
†Source: Treasury Department, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, February 2016.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.