- Capital gains tax increase: The current top rate is 20%; the Biden plan would nearly double it to 39.6% for individuals making more than $1 million annually. There’s also a separate proposal creating a 44.6% capital gains rate for those with high net investment and taxable income. This rate hike, combined with the plan to largely eliminate the ‘stepped-up basis’ loophole (we’ll get to that) will be a major blow to some investors
- Top marginal income tax rate increase: This would go from 37% to 39.6% (a 7% increase in taxes) for those individuals earning over $400,000.
- Medicare tax increase (the Net Investment Income Tax (NIIT)):The Medicare tax rate will go from 3.8% to 5% for individuals earning over $400,000 annually. This basically closes the loophole on those business owners with pass-through entities who have avoided the tax.
- Corporate tax increase: This would jump from 21% to 28%. It’s interesting that the TCJA made corporate tax cuts permanent while individual cuts sunset next year. Some business owner will be seriously impacted. By the way, the corporate alternative minimum tax (CAMT) would increase from 15% to 21%.
- Repeal of like-kind exchanges: The Biden plan would repeal Section 1031 of the tax code which currently allows for tax-deferred ‘like kind exchanges’ of real estate. Note Section 1035, which allows like-kind exchanges of insurance and annuities, does not seem to be under attack.
- Carried interest loophole closure: Certain types of carried interest would be treated as ordinary income rather than capital gains. This will likely impact taxes paid by private equity and hedge fund managers.
- Billionaire minimum tax: A new minimum tax would be imposed on households with a net worth exceeding $100 million. The Supreme Court’s recent ruling shows they’re less than enthusiastic about this provision and administration of this provision would be a nightmare.
- Elimination of stepped-up basis: As mentioned earlier, the Biden plan would largely eliminate this provision where capital gains are not taxed when assets are transferred at death or by gift. This has bi-partisan opposition, however due to the damage it would do to family farms and family businesses.
- Increased limit on deducting employee compensation: The $1 million cap would be expanded to apply to all employees of publicly and privately held C corporations. This would be good for business owners.
- Higher excise tax on stock buybacks: This would increase from 1% to 4%, which could impact some investors’ investment strategies. This will also likely face strong opposition from large corporations.
The nearly $3 trillion in projected deficit reduction over 10 years (provided no new spending is added) signals the administration’s intent to raise revenue; but, you can expect a healthy debate in Congress.
By the way, even if none of these proposals are enacted, the TCJA still expires at the end of next year and taxes for most everyone will go up anyway. You can see a comparison here.
Enjoy,
Jim
