Income Tax Rates
Under current law, there are seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent, which are applicable from 2018 through 2025 under the TCJA.
During the campaign, Biden proposed increasing the top rate back to 39.6 percent, where it sat prior to the TCJA.
It is not clear at what income level Biden would have this new top rate apply, however, he has stated repeatedly that only taxpayers with incomes over $400,000 would see a tax increase. For 2021, the current top rate of 37 percent applies to single taxpayer income exceeding $523,600.
Under current law, a capital gains rate of 0 percent, 15 percent, or 20 percent applies to capital gains and qualified dividends received by individuals, depending upon the amount of the individual’s taxable income. For 2021, the 20 percent rate applies to joint filers with taxable incomes over $501,600 ($473,750 for heads of households, $445,850 for single filers, and $250,800 for married taxpayers filing separately).
Biden’s proposal would increase the top tax rate on long-term capital gains for taxpayers earning more than $1 million annually and eliminate the step-up basis tax expenditure that allows decedents to pass capital gains to heirs without tax. The top rate on long-term gains would nearly double from 23.8 percent to 43.4 percent, according to the Tax Foundation.
Child Tax Incentives
Biden proposed expanding the earned income tax credit (EITC) and dependent care credit. Further, Biden has proposed a refundable $8,000 child care tax credit for a qualifying child or up to $16,000 for two or more children. The maximum Child Tax Credit is $2,000 through 2025 under the TCJA.
Additionally, Biden proposes a new $5,000 tax credit for caregivers of individuals with certain physical and cognitive needs.
Limitation on Itemized Deductions
Prior to the TCJA, a limitation on itemized deductions (the so-called “Pease limitation”) took effect at higher income levels (in 2017, $318,700 for joint filers, $287,650 for heads of households, $261,500 for single filers, $156,900 for married taxpayers filing separately). The TCJA eliminated the limitation.
Biden proposed restoring the Pease limitation on itemized deductions for taxable incomes above $400,000.
Generally, income that flows to a partner from a private investment fund is taxed at the lower capital gains rates with a three-year holding period requirement for certain long-term capital gain and loss. Biden proposed eliminating carried interest.
Currently, the FICA tax of 12.4 percent is split between employer and employee. Under an executive action issued in August, employers are allowed to defer the collection and payment of the employee’s share of the FICA tax during the September to December 2020 period to January of 2021. Trump promised to eliminate the deferred taxes if re-elected. With Trump not winning a second term, it appears these deferred taxes will come due at the beginning of 2021.
Anecdotal evidence in the media indicated that very few employers took advantage of this executive action.
Biden proposed a Social Security payroll tax of 12.4 percent for earnings above $400,000.
For more information about this tax policy update, contact your CPA at Larson & Company.