Joe Biden’s tax plan includes changes that will be especially significant for taxpayers who have very high incomes or who are very wealthy. They could also impact homeowners in places like the San Francisco Bay Area and Silicon Valley where property values are very high.
Here is a link to the Tax Foundation’s summary of Biden’s tax proposals. https://taxfoundation.org/joe-biden-tax-plan-2020/
This plan might not happen if the Republicans continue to control the Senate. We won’t know that until after the Georgia runoff election on January 5, 2021.
Here are some of the most significant changes, with suggested year-end tax planning moves for 2020, assuming the proposals are enacted. Please consult with your tax advisor before taking action on these suggestions.
1. Taxpayers with income exceeding $400,000 would experience significant tax increases, including (1) maximum income tax rate increased from 37% to 39.6%; (2) 6.2% employee and 6.2% employer social security tax for wages exceeding $400,000; (3) increase tax rates on long-term capital gains and qualified dividends from 20% to 39.6%. And more.
In short, this may be the time to accelerate, not defer, taxable income, including selling appreciated assets.
For 2020, consider avoiding tax-deferred exchanges and installment sales.
Consider making Roth conversions.
2. The estate and gift tax exemption would be reduced from $11.58 million for 2020 to $3.5 million. The maximum federal estate tax rate would increase from 40% to 45%.
Now may be the time to make significant gifts, including leveraging the exemption by making gifts of minority interests to multiple beneficiaries. If you decide to explore making gifts of minority interests, appraisals will be required. NOW is the time to get started!
Also, some families might decide to “pull the plug” for terminal family members. (Sorry for the morbidity.)
3. The step-up in basis of inherited property would be repealed.
Keeping good basis records will be critical.
Another incentive to sell appreciated assets during 2020.
There may be a floor, say one million dollars of assets, for which a basis adjustment will still be allowed. The devil will be in the details.
This will remove a significant incentive for holding assets until death. Lifetime gifts of income-generating assets will be even more beneficial under the Biden proposal.
4. Increase C corporation maximum income tax rate from 21% to 28%.
Accelerate income, defer deductions for 2020. Elect out of bonus depreciation and the expense election.
5. Double the tax rate on Global Intangible Low Tax Income (GILTI) from 10.5% to 21%.
6. Re-establish the First-time Homebuyer’s Credit, up to $15,000 for first-time homebuyers.
Home buyers who would qualify should wait until 2021 to buy a home.
These are highlights. I recommend that you read the Tax Foundation summary and discuss it with your tax advisor.