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Tax Implications of a Biden Administration

Tax brackets, estate tax, even real estate deals - here are some of the proposals that might affect you.

Note: the following is an analysis of the potential tax implications of a Biden presidency and should not be construed as a prediction of election results. Baird does not endorse any candidate running for any office.

With two very different candidates running – and control of Congress at stake as well – the 2020 presidential election could have significant implications on many aspects of our lives. One of the biggest differences between the two parties is in tax policy, where Democratic candidate Joe Biden has proposed repealing many of the aspects of the 2017 Tax Cuts and Jobs Act (TCJA), while President Donald Trump would prefer to make many of its temporary provisions permanent. 

Should Biden win the election and Democrats take control of the Senate, here are some of the tax changes that may affect you:

Increase in Individual Tax Brackets

Some of the key changes proposed by Biden:

  • Increase the top tax rate for individuals with income over $400,000 to 39.6 percent.
  • Impose the 12.4 percent Social Security tax on wages above $400,000, to be evenly split between the employer and employee, creating a “donut hole,” since wages between $137,700 (the current wage cap for 2020) and $400,000 would not be subject to the tax.
  • Tax long-term capital gains and qualified dividends at 39.6 percent for individuals with income over $1 million. Currently, all long-term capital gains and qualified dividends are taxed at a maximum rate of 20 percent.

Limitations on Individual Tax Deductions

Biden’s tax plan phases out the qualified business income deduction if your taxable income is more than $400,000. It also restores the Pease limitation on itemized deductions, which reduces a taxpayer’s itemized deduction by the lesser of 3 percent of income over a specified threshold, or 80 percent of total itemized deductions. Additionally, the tax benefit of all itemized deductions would be capped to 28 percent of their value, regardless of your tax bracket, as opposed to the current deduction at your marginal tax rate.

For example, an individual who itemizes on their return would receive a benefit equal to 32 percent for each additional dollar claimed as an itemized deduction. Under the proposed changes, the benefit would be limited to 28 percent of the deduction value.

One benefit for wealthy taxpayers: Biden intends to eliminate the $10,000 cap on state and local tax (SALT) deductions, which is imposed by the TCJA. The repeal of the cap would be a rare instance of Biden’s plan offering a tax break to the wealthy.

Expansion of Individual Tax Credits

Biden also plans to introduce or expand several tax credits, including:

  • First-time homebuyers may be eligible for a First Down Payment Tax Credit worth up to $15,000, which would help cover the costs associated with purchasing a new home. We saw a similar credit in the Housing and Economic Recovery Act signed by President Bush in July of 2008, which expired in 2010.
  • The child and dependent care credit would increase from the maximum amount of $2,100 to $8,000. The eligible credit would still be phased out for individuals with higher income.
  • The earned income tax credit for childless workers aged 65 and up would be expanded
  • The full electric vehicle tax credit would be reinstated
  • The Affordable Care Act’s premium tax credit would be expanded.

Changes for Real Estate Investors

Biden proposes eliminating the 1031 exchange, commonly known as a “like-kind exchange.” This section of the Internal Revenue Code allows real estate investors to defer recognition of a capital gain on the sale of business property by investing the proceeds into another business property.

Estate Tax Changes

Biden proposes reducing the estate tax exemption from the current $11.58 million per person to the pre-TCJA $5.49 million, adjusted for inflation, with the estate tax rate unchanged at 40 percent. However, Biden’s plan does include the elimination of the step-up in basis at death.

This would also mean a decrease in the lifetime gift exemption, which is the amount you can give to third parties during your lifetime without paying gift tax and is equivalent to the estate tax exemption. Any time an individual makes a gift over the annual exclusion amount, both their lifetime gift and estate tax exclusion are reduced; upon death, any unused gift exclusion can be used as an exclusion on their estate tax return. If these ideas are new to you, this guide to Estate Planning from Baird can help you get started.

It’s important to remember that these are only proposals, and that any changes to the tax code will depend heavily on what Congress chooses to pass. Talk to your Baird Financial Advisor about how these proposals might affect you.