It appears the Democrats will be taking control of the Executive Branch on January 20, 2021. This does not automatically mean your taxes will be changing as it is still unclear whether the Democrats will also control Congress. While the Democrats will control the House, the balance of power in the Senate may also shift to them depending on the outcome of Georgia’s run-off elections taking place on January 5, 2021. If both of Georgia’s Senate seats are won by Democrats, control of Congress will be in their hands. Assuming this scenario and the fact the nation’s economy has suffered from the COVID-19 pandemic and civil unrest, taxes are going to be a major issue in 2021 and beyond. Below is a brief summary of how “paying your fair share” may potentially change under the Biden administration and a receptive Congress, based on the President-Elect’s published tax positions. Keep in mind that none of what discussed below is current law and therefore will not affect your 2020 taxes.
INDIVIDUAL INCOME TAXES
Ways Your Individual Income Taxes May Decrease
- If you have children, you may see a larger Child Tax Credit (a credit for just having children in your home), which could increase from $2,000 to $3,000 for children 17 or under with a $600 bonus credit for children under 6. This credit may also be made fully refundable.
- If you care for children or dependents, you may see a larger Child and Dependent Care Tax Credit (a credit for certain childcare or dependent care services you paid for) in the form of an increase from $3,000 to $8,000 ($16,000 for multiple dependents) of qualified expenses that may be reimbursed of up to 50% (versus 35% currently) – meaning, you could see a $4,000 to $8,000 tax decrease if you qualify for this credit.
- If you qualify for the Earned Income Tax Credit (a credit for certain low- to moderate-income earners), your taxes may decrease if you are childless and 65 or older.
- If you are a first-time homebuyer, you may receive a tax credit of up to $15,000, similar to what was provided during the Great Recession.
- If you are a renter, a new refundable renter’s credit may be established aimed at holding rent and utility payments at 30% of monthly income.
Ways Your Individual Income Taxes May Increase
- If you make more than $400,000 per year, your taxes may go up through:
- An increase in the ordinary individual income tax rate from 37% to 39.6%;
- A 12.4% Social Security payroll tax on income earned above $400,000 (if self-employed, you pay the entire 12.4%, if a wage-earner you pay 6.2% and your employer pays the other 6.2%); and
- Limiting itemized deductions to 28% of value (also, Biden’s plan does not repeal the state and local tax deduction cap of $10,000).
- If you receive an inheritance in 2021, you may not receive a stepped-up basis in the assets you inherit, meaning you will have a lower basis and therefore higher tax liability when you sell the inherited assets. NOTE: there may also be additional changes to the estate tax as outlined by FMJ’s Trusts & Estates group here.
- If you have income greater than $1 million, long-term capital gains and qualified dividends will be subject to the ordinary income tax rate (39.6%) versus the maximum 20% long-term capital gain rate in effect now.
CORPORATE INCOME TAXES
Ways the Corporate Income Tax Could Decrease
- Potential for new credits, the tax value of which is unknown at the time of this writing. Proposals include:
- A new “Manufacturing Communities Tax Credit” applicable to businesses that experienced workforce layoffs or a major government institution closure (e.g., the federal government closes a U.S. Postal Service sorting facility);
- A tax credit for small businesses that establish workplace retirement savings plans; and
- A “Made in America” tax credit available to businesses that restore production, reopen closed facilities or save closing facilities, retool facilities, or hire manufacturing workers in the United States.
- Potential expansion of credits related to renewable energy, such as the Energy Investment Tax Credit (credit for installing solar panels) and the Electric Vehicle Tax Credit (credit for purchasing an electric vehicle). NOTE: these credits can also be claimed by individuals on their individual income tax return if certain requirements are met.
Ways the Corporate Income Tax Could Increase
- The corporate income tax rate may increase from 21% to 28%.
- A new 15% corporate minimum tax on book income (profits) of $100 million or more – meaning a business will pay the higher of their regular corporate income tax or this proposed 15% minimum tax.
- Potential for a new 10% surtax on businesses that offshore manufacturing and service jobs to foreign nations in order to sell goods or services back to the United States.
OTHER TAX CONSIDERATIONS
Individuals and businesses should also pay attention to state and local taxes. While here in Minnesota the Legislature remains divided with Democrats controlling the House and Republicans controlling the Senate (which acts as a firewall of sorts against any major tax changes), 2020 has been an interesting year, to say the least. Don’t be surprised if states and localities change their taxes in some significant respect – particularly sales taxes, property taxes, gas taxes, and “sin” taxes (tobacco and alcohol) – to fund the COVID-19 battle and repair damage from civil unrest. While tax increases are more likely with respect to these taxes, you could also see tax decreases in the form of property tax credits to businesses damaged during civil unrest or some other tax credit for businesses significantly affected by COVID-19.
None of the tax increases or decreases discussed above are guaranteed. However, individuals and businesses need to be cognizant of tax law changes that may affect them beginning in 2021 as the most likely scenario is that at least a handful of significant tax law changes will be made to pay for a year many of us thought we would never see. At FMJ, we will continue to monitor any significant changes to the tax codes and provide updates on any such changes.
In the meantime, if you have questions about how a particular tax (or tax proposal) may affect you individually, your business, or your estate plan, contact Nate Haynor at nathan.haynor@fmjlaw.com, David Ness at david.ness@fmjlaw.com, or Jim Seifert at james.seifert@fmjlaw.com.
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