President Biden has proposed a $1.9 trillion relief package that will put pressure on lawmakers to offset the spending with tax increases or federal borrowing. During his campaign, President Biden supported tax increases on the wealthy, which he identified as individuals earning more than $400,000 a year. For these taxpayers, President Biden favors the following tax increases:
- A 12.4% social security payroll tax on earned income exceeding $400,000;
- An increase in the top marginal individual income tax rate to 39.6% for taxable income above $400,000;
- Phasing out the qualified business income tax deduction for taxpayers with taxable income above $400,000;
- Capping the benefit of itemized deductions to 28% of their value and restoring the ‘Pease” limitation on itemized deductions for taxpayers earning more than $400,000; and
- Taxing long-term capital gains at ordinary income tax rates on income above $1 million.
President Biden has further proposed to return the estate and gift tax exemption and rate to 2009 levels, which would result in an exemption of $3.5 million and a highest marginal tax rate of 45% ( the estate and gift tax exemption currently is $11.7 million with a highest marginal rate of 40%). He also has proposed the elimination of the basis step-up at death.
These proposals are a stark contrast to the tax policy underlying the Tax Cuts and Jobs Act, which saw a reduction in income tax rates, an increase in the AGI limitation (which was subsequently temporarily suspended under the CARES Act) for certain cash charitable contributions and an increased estate and gift tax exemption.
Wealthy taxpayers were encouraged to consider and plan for the possibility of tax increases before 2020 closed and many did so by accelerating income and making large gifts.
As we move forward in 2021, the possibility of tax increases on wealthy taxpayers looms. While retroactive legislation is possible, there is little precedent for retroactive legislation that negatively impacts taxpayers. Taxpayers should consider consulting with their advisors before engaging in large transactions that may result in the taxpayer’s taxable income exceeding either the $400,000 or $1 million thresholds and before undertaking any estate and gift tax planning in 2021.