How Much Will Income Tax Rates Rise, and When?
As you can see from the chart below, current income tax rates are on the low end compared to the highest rates in history.
Part of this is the result of the tax reductions passed in 2017 and effective in 2018. However, the 2017 law will expire in 2026 and rates will jump back to previous levels for individuals.
However, the Biden Administration is not planning to wait for current rates to expire. They have plans to spend money and assume they can get it by raising taxes.
According to Allianz, here are some of the goals that the Biden campaign discussed –
Personal income taxes
- Raise the top individual income tax rates from 37% to 39.6%.
- Taxpayers with more than $1 million of taxable income would pay ordinary income tax rates on capital gains and qualified dividends (instead of the lower capital gains tax rate).
- Impose Social Security taxes on taxable income above $400,000. Currently this only applies to income above the Social Security wage base (set at $142,800 in 2021).
- New $5,000 tax credit for family caregivers (those meeting the cognitive or physical needs of a family member).
- New tax incentives for the purchase of long term care insurance (details not specified).
- Changes related to contributions to qualified retirement plans to “equalize” the tax benefits for all levels of income (details not specified).
- Repeal the $10,000 cap on SALT deductions (deduction for state and local taxes). However, another proposal would limit the tax benefits of itemized deductions to 28% of value for those making over $400,000. For example, a taxpayer making over $400,000 who has $50,000 of itemized deductions would be limited to using $14,000 of those deductions.
Estate and gift taxes/taxes at death
- Decrease the applicable exclusion amount for estate and gift taxes. Exclusion in 2021 is $11.7 million ($23.4 million for a married couple). No official figure has been proposed, but exclusion likely to be reduced to $3.5-$5 million ($7-$10 million for a married couple).
- Repeal of the step-up in basis rules at death. Basis of deceased owner would carry over to heirs. It’s uncertain if death would trigger the tax, or if the tax would be triggered when the asset was sold by heirs. Also, it’s not certain if appreciation prior to repeal of step-up basis rules would be grandfathered in.
Business and business owner taxes
- Raise the corporate tax rate from 21% to 28%.
- Phase out of the 20% qualified business income deduction for taxpayers with taxable income above $400,000.
- Revise the tax-free nature of 1031 exchanges (exchanges of commercial real estate) such that it applies only to those with taxable income under $400,000. This has not been promoted heavily by the Biden campaign.
- Impose a 15% corporate minimum tax on book income (applicable only to companies with $100 million or more of net income but which owe no U.S. income tax).
The GOP will try to block some or all of these changes. What do YOU think will happen?