In this blog we will discuss how the US election results will possibly US impact taxpayers, including US persons living overseas (the US taxes its citizens on a personal basis regardless of their domicile).
We assume that Democrat Joseph Biden has won the presidential election, and that the Democrats have retained control of the House of Representatives, albeit with a reduced majority. We note that the election results are not final yet, and a lot depends on the results of the two Georgia special elections, which will determine who will control the Senate (currently 50 Republicans and 48 Democrats).
We conducted a webinar Nov 16 on how the US election results and the proposed tax plan of President-elect Biden could possibly impact taxpayers. The tax portion was addressed by Larry Stern, CPA, (US) Partner at Aboulafia & Co, in Israel, who is an expert on US taxation matters for US expatriates. You may listen to the webinar replay on our Nardis Advisors YouTube channel to get an exact explanation.
We offer here a summarized version of the webinar. We are not tax experts, so please do listen to the recording. Most importantly, please speak to your tax advisor, and your investment advisor, before taking any specific action.
The Biden Tax Plan
President-elect Biden has generally stated his goal of increasing taxation for individuals with income of over $400,000 per year. He considers these people high earners.
In addition, he wants to increase the corporate tax for domestic and multinational companies. Those rates had been reduced significantly under President Trump, from 35% as the maximum rate down to 21%. President-elect Biden wants to raise this to 28%. He also intends to award credits and refunds for low-income earners, and to provide credits for environmentally friendly activities. One of the first things that the President-elect said is that he wants to re-enter the Paris Agreement on Climate Change.
Please keep in mind that these tax proposals are not final. It is unknown when and how any tax changes would go into effect. Composition of Congress and budgetary considerations will impact any final tax proposal.
Having said that, let us dive into each of these aspects of the Biden Tax Plan in more detail.
Increase taxation for Individuals
The Biden Tax Plan has the potential to impact individuals in several ways. Under President Trump, the highest income tax rate reduced from 39.6% to 37%. President-elect Biden would like to reverse this tax cut on and increase the highest tax bracket back to 39.6%
One thing he is looking to do, which over the last couple of decades has not been the case, is to tax long term capital gains and qualified dividends at the ordinary income maximum rate of 39.6% for people who have income of over a million dollars per year from all sources. That is a significant change from the way that taxation works now. Long term capital gains and dividends are kept at a 20% tax rate right now (plus 3.8% for Obamacare taxes).
President-elect Biden would be looking to limit the itemized deductions for those earning above $400,000 a year too.
Under President Trump, the tax credit eligible for each dependent child increased from $1,000 to $2,000, of which $1,400 of it was refundable. The President-elect is looking to raise that even further, to $3,000 per child under 17 with an additional $600 bonus credit for children under six. This could be a significant boon for lower earners.
Also, he would be looking to make the tax credit fully refundable. In other words, if you don’t have a tax bill, either because of foreign tax credits or for other reasons such as the standard deduction if your income is that low, he would be looking to make that child care credit a fully refundable credit. Basically, this would expand it to more people, and raise the amount.
The Child and Dependent Care Credits currently are limited to $3,000 per child for up to two children. President-elect Biden would be looking to raise the recognized expenses for those dependent care expenses to $8,000. The amount would be up to $16,000 when you have more than one child. In addition, it would increase the maximum reimbursement rate, or credit rate, from 35% to 50%, so that the maximum credit would be $8,000 for more than one child.
In addition, certain qualified business income deductions (section 199A) for self-employed individuals or investors in certain partnerships would be reduced and/or phased out for those who have income above $400,000.
On the other hand, it would expand the Earned Income Tax Credit for US residents who are childless workers ages 65 and over.
It would provide renewable energy tax credits to individuals such as electric car credits etc. The President-elect wants to re-establish, after many decades, the First Time Homebuyer’s Tax Credit, which would provide a tax benefit to those individuals who are first time homebuyers to assist them in buying their home. This could be a credit of up to $15,000
With regards to retirement accounts, President-elect Biden would like to replace the tax deduction from income for 401(k) and IRA contributions, with a corresponding refundable tax credit. Larry notes that how this would work is yet unclear. It is also unclear what would happen to previously deducted 401(k) and IRA contributions.
Payroll/Social Security under the Biden Tax Plan
Right now, people whether they are an employee or self-employed, pay Social Security up to the first $137,700 of income. Anything above that is not subject to Social Security tax. That is a tax rate of 12.4%, split into 6.2% for the employer and 6.2% for the employee. If you are self-employed you pay the full 12.4%.
What President-elect Biden is looking to do is re-institute the 12.4% tax on wage income above $400,000. What that basically means is that on the first $137,700 there would be a Social Security tax for everyone. There would be no tax between $137,700 and $400,000. And then there would be tax again on incomes above $400,000.
That could be a very big hit, especially for people who are self-employed who are high earners. This includes US expatriates, who have to pay local social security tax in the country of their residence too. There are tax planning opportunities available to help reduce expat exposure to US Social Security tax, and these should be discussed with a tax advisor.
Estate/Gift Tax under the Biden Tax Plan
President-elect Biden is looking to revert the estate and gift tax, both in terms of its tax rate and also the exemption amount. Currently there is an exemption amount of $11.5 million per US citizen. President-elect Biden is looking to bring those exemptions back in line with the 2009 rates. This would reduce those exemptions to $3.5 million for estate tax and $1 million for gift tax (the latter could be $3.5 million too – this is not final).
If these exemptions are going to be reduced so significantly, there may be some tax planning to do before this potentially happens. In addition to the estate tax exemptions being reduced, the maximum estate tax rate would rise from 40% to 45%.
In addition, President-elect Biden is also considering the cancellation of basis step-up at death. Under current law, when somebody dies, their beneficiaries/heirs receive a step up in basis. So, for example, if the deceased bought shares of Apple at $1, and they were worth $100 at the time of his or her passing, the heirs’ cost basis for calculation of capital gains will step up to $100,
Cancelling that basis would significantly increase the potential capital gains tax on the beneficiaries when they dispose the assets they have inherited. It makes the taxation of asset transfer at death to be similar to asset transfer as a gift (during lifetime), as gifts do not receive a step up in basis.
Business taxes under the Biden Tax Plan
President Trump had reduced the maximum corporate tax rate from 35% to 21%. He also moved it from a marginal rate involving different brackets to a flat 21%. President-elect Biden is looking to raise that to 28%.
Larry opines that that could have an impact on the cost of goods people are looking to buy. If corporations must pay more tax, it could challenge US businesses versus international businesses. Larry notes that 21% is more or less an average of corporate international tax rates, the 28% rate would be higher than most other countries.
In addition, the President-elect would like to add a minimum tax on corporations, even if they do not have sufficient taxable income, if they have book profits of $100 million or higher, (before depreciation and other charges). This would apply to big multinational companies or extremely large domestic companies.
He would like to offer tax credits to small businesses for adopting workplace retirement savings plans. There are no such tax credits currently available. Larry notes that it would help incentivize these small businesses to help their employees save for retirement. Most large businesses do have these types of plans. Small businesses usually do not have the cash flow to be able to provide that.
President-elect Biden also wishes to expand renewable-energy-related tax credits for carbon capture, use, and storage, credits for residential energy efficiency, and restore the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. Those are all in line with the President-elect’s desire to be more environmentally friendly.
He also wants to end tax subsidies for fossil fuels and impose a surcharge on corporations that move manufacturing and service jobs offshore to sell goods and services back to the US market. He wants to keep work and jobs in America. In addition, he aims to create a “Made in America” tax credit for activities that restore production, revitalize existing closed or closing businesses, and other business development.
International taxes
There are some international issues that have been addressed in the Biden tax plan. One such item is GILTI (Global Intangible Low Tax Income). The goal of GILTI has been geared towards multinational corporations who leave profits offshore in low income tax jurisdictions and do not bring them back to America.
Unfortunately, Larry notes that many US individuals living outside the US have been harmed by these GILTI rules as they also impact individuals who own a Controlled Foreign Corporation (a corporation with greater than 50% ownership by US persons) . That can be citizens, companies, or Green Card holders.
If the company is owned more than 50% by US persons, the shareholders of that company could be subject to tax on the profits of the company even if the profits are not withdrawn from the company. That is what the GILTI law said.
In many cases there was tax planning available to minimize or eliminate the tax hit caused by GILTI.
One of the things the President-elect is looking to do is to raise the GILTI tax from 10.5% to 21%. This could affect significantly more people.
However, one of the things that may help people in these situations is that he would look to assess GILTI on a country-by-country basis. This could potentially lead to countries with a high corporate tax rate being exempt while countries with extremely low corporate tax rates may still be subject to the tax.
There are currently certain Qualified Business Asset Investment deductions available. President-elect Biden would be looking to eliminate those, raising the amount of tax that a US shareholder in a foreign corporation may need to pay.
Summary of how the US 2020 election results and the Biden tax plan will possibly impact taxpayers
As you can see, there are many changes that are likely to occur as President-elect Biden potentially takes office. For information about how these changes may specifically apply to your situation, please consult your tax advisor, financial advisor, and attorney.
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Norman H. Chait, CFA Managing Principal, Nardis Advisors LLC, November 24, 2020
Disclaimer: Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.
