• Itemized Deductions. The Biden tax plan would cap the tax benefit of itemized deductions to 28% for those with taxable income of more than $400,000. In addition, the plan would restore the Pease limitation for taxable income above $400,000 by reducing the value of certain taxpayer’s itemized deductions by 3% for every dollar of taxable income over the threshold.
Qualified Business Income
The TCJA created the qualified business income deduction (QBI) which allows taxpayers other than C corporations to deduct 20% of qualified business income, as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnerships income. The Biden tax plan would end special qualifying rules, including those for real estate investors. Additionally, it would only allow a deduction for taxpayers with taxable income of $400,000 or less.
Payroll Taxes
Under current law, payroll taxes to support FICA (Social Security) and Medicare are paid in equal parts by both an employer and employee. FICA tax is limited to the first $137,700 (for 2020) of wages where the Medicare tax is not limited. Biden proposes to expand FICA taxes to apply again once wages exceed $400,000. However, wages between the first limitation wage base and less than $400,000 would not be subject to the additional FICA taxation.
Businesses
Corporate Tax Rates The Biden tax plan suggests instituting a 28% flat tax (under current law it’s 21%) and instating a 15% alternative minimum tax rate for companies which have zero or negative federal income tax liability but report more than $100 million in book income. Additionally, the plan looks to institute a 10% offshoring penalty surtax on the profits of companies that use foreign production for products that will be sold in the U.S.
Credits and Incentives
• New Market Tax Credit. The Biden tax plan would expand the new markets credit program to permanently provide $5 billion in support each year.
• Work Opportunity Tax Credit. Under the Biden tax plan, the work opportunity tax credit would be expanded to include military spouses.
Real Estate
• Like-Kind Exchanges. Under the current law, taxes on gains of real property may be deferred if the proceeds are invested in similarly or that of other like-kind property. The Biden tax plan might repeal or further limit the like- kind exchange rules.
• 199A Deductions and Real Estate Losses. The Biden tax plan proposes ending qualified business income deductions (Section 199A) for real estate investors, as well as preventing investors from using real estate losses to lower their income tax bills.
What This Means for Taxpayers
When analyzing the impact of presidential elections and potential changes, taxpayers need to look at both their short- and long-term financial plans. For individuals, thinking about succession and estate planning becomes critically important. If these plans become reality — and again, there is no guarantee or expectation that the aforementioned proposals will become law — many existing estate plans may need to be analyzed to determine if they are still efficient from a tax planning perspective. For businesses, considering the changing tax rates, as well as the availability for new or increased tax credits and deductions, becomes increasingly important as they consider their long-term financial success and viability.
By Randy Hooper, Partner, KSM Transportation Services Group
RHooper@ksmcpa.com
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