Joe Biden’s Tax Plan: What Could Pass and How Those Changes Affect You

Fun Fact: The writing on the Rosetta Stone, a monumentally important artifact, and the key to deciphering ancient Egyptian hieroglyphics, is mostly about taxes.

Welcome back to Jay’s Tax Insights, where we take the time to break down complex tax items and cover trending tax topics on a monthly basis to provide you with insight on the topic and assist with improving your financial standing for years to come. In today’s blog we focus on the ongoing U.S. Senate Race and the impact it has on the implementation of President-elect Joe Biden’s proposed tax policies. We also identify the most and least likely tax policies to be enacted and discuss timing of these potential changes.

Impact of The Senate Race:

With Joe Biden aligned to be the next U.S. president, after defeating incumbent President Donald Trump in the Nov. 3, 2020 election; and with Democrats retaining the majority of seats in the House of Representatives, the trajectory of tax policy in 2021 is largely dependent on which party will control the U.S. Senate.

To understand this further, Republicans currently hold the majority of the Senate seats at 50-48. If incumbent Georgia Republicans David Perdue and Kelly Loeffler hold their seats, the GOP will have majority control and greater ability to block President-elect Joe Biden’s agenda and tax proposals from the Democratic-controlled House. But, if challengers Jon Ossoff and Raphael Warnock win, Democrats would gain control of the Senate with Vice President-elect Kamala Harris, in her role as president of the Senate, casting tiebreaking votes. Mr. Biden would have a far better chance of significant tax policy changes.

Thus, as we progress closer to the January 5th, 2021 Georgia Senate runoff elections, we realize more and more that the likelihood of President-elect Joe Biden’s bold plan for sweeping tax increases on the wealthy have been vastly diminished in the absence of large Democratic wins in the U.S. House of Representatives and Senate to date. But don’t let this defer you from thinking that there will not be tax changes taking place. Conservative lawmakers could find some parts of Biden’s plan more palatable and less politically charged than others, and compromises are likely as pressure to raise federal revenue mounts under a soaring deficit.

Biden’s focus on raising income taxes on the top 1% of earners, for instance, could appeal to some Republicans nodding toward a more populist agenda and could evidently get pushed through. More far-reaching changes, such as eliminating a big tax break on inherited property, will probably be swiftly abandoned.

“Since it wasn’t a blue wave, it’s much less likely we’ll see sweeping reform,” says Ali Hutchinson, managing director at Brown Brothers Harriman. “But there’s an appetite to get things done, and Joe Biden is known to be a dealmaker; to have good relationships across the aisle in Congress.”

Tax Changes Most Likely to be Enacted

As we review the proposed tax policies set forward, the policies with the best chances of being enacted are those that essentially accelerate the sunsetting of provisions in the Tax Cuts and Jobs Act of 2017, turning back the tax clock to pre-President Trump. In addition, relief for low- and middle-income taxpayers, and tax breaks to encourage retirement savings are most likely to get bipartisan support as a way to help families hardest hit by the economic downturn.

In a 50-50 Senate scenario, Garrett Watson, senior policy analyst at the Tax Foundation, ranks two tax increases as being the most likely to succeed: an increase in the corporate tax rate from 21% to 28%, and a bump in the top marginal income-tax rate for folks earning $400,000 or more from 37% to 39.6%. This would unwind some of the TCJA, which lowered the corporate tax from 35% and notched down the top income-tax rate from 39.6%.

“There’s more agreement on those changes in the Democratic caucus and they’re easier to pull off, versus making changes to the tax code or enacting tax changes that are difficult to design,” Watson says.

A close third in order of likelihood is a reduction in the estate-tax exemption, which approximately doubled under the TCJA to a current $11.58 million per person, or $23.16 million for a married couple. Biden proposes to dial that back to the 2009 level of $3.5 million, adjusted to inflation, and raise the estate-tax rate from 40% to 45%.

“This is a reversion to previous law, so administrating the policy change is not in question, and it is straightforward to legislate,” Watson says.

Tax Changes Least Likely to be Enacted:

On the opposite spectrum, tax hikes with little chance of success, due to a combination of political friction and complexity to draft and administer are an increase in tax rates on capital gains over $1 million from 20% to 39.6% and a new 12.4% payroll tax on earnings over $400,000, Watson says.

Analysts agree that one aspect of Biden’s plan would-be dead-on arrival in Congress: an elimination of the step-up in cost basis at death. Current law allows the cost basis on appreciated assets to be reset to their current market value upon their owner’s death, essentially wiping out embedded capital gains for tax purposes.

If Republicans maintain a majority in the Senate, the chances of tax changes diminish, “but there still might be some tax legislation ultimately passed where the Republicans get something they want, and the Democrats get something they want,” says Kyle Pomerleau, a resident fellow at the American Enterprise Institute.

The stimulative measures in Biden’s plan that ease tax burdens on low- and middle-income families will likely be the easiest for a Congressional majority to swallow. Among Biden’s proposals: a temporary increase in the child tax credit, from $2,000 per child up to age 16 to $3,600 per child up to age 6 and $3,000 for children up to age 17; raising the child and dependent-care tax credit from a maximum of $2,100 to $8,000; a new $5,000 credit for informal caregivers; and a tax credit for lower-income 401(k) contributors.

Timing of these Changes:

As for timing, any changes will likely be effective in 2022 or 2023, analysts say. While new tax rules can be made effective retroactively as long as they are adjustments to existing rules and not entirely new, the chances are slim that they’ll impact taxpayers next year, says Kate Barton, EY’s global vice chair of tax. “Let’s say there’s a 10% chance for 2021,” she says.

There are a couple of obvious opportunities for Democrats to negotiate and pass some changes next year, if Congress crafts an economic-stimulus bill early in the year, as is expected; or at the end of the year, when several business-related tax provisions are set to expire and an extension package will be up for vote, says Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.

But it’s unrealistic to expect Congress to spend a lot of time and energy on a broad tax bill soon, Gleckman says. “Normally, a newly elected president has one big thing he can do in his first year,” he says. And for Biden, “COVID-19 is going to suck out most of the time and energy.”

Planning Considerations:

Despite this uncertainty, the significant tax law changes over the next few years remain a real possibility, and it is not too early to start evaluating the proposals being put forward, modeling potential outcomes, and planning the appropriate actions to take if and when these proposals go from high-level plans and talking points to fully framed legislative policies with substance, effective dates, and, presumably, anti-avoidance rules.

For planning assistance going forward or if you may have any questions regarding the topics discussed above, please feel free to reach out to our team at the link below.

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