After the unfolding of the vote counting in the last American presidential elections, it appears that Joe Biden will start his term as President of the United States in January 2021. In this context, the country’s tax system is likely to undergo changes starting next year.
If the Democrats manage to get a majority and get control of the House and the Senate, the implementation of the president’s plans will become very likely. In this scenario, it is estimated by the Center for Fiscal Policy and the US Tax Foundation that about $4 trillion will be collected in the next 10 years. According to Biden, any excess collected will be invested into the country’s infrastructure.
In order to better understand this topic, we have brought together some of the main differences between the tax policies currently in force in the USA and those proposed by Joe Biden:
1 – Taxes for Individuals:
Currently, the USA uses a progressive income tax rate system, that is, the rates increase proportionally to the amount of revenue taxed. Using a seven-step system, tax rates for personal income start at 10% and increase to 37% for taxable incomes of $ 622,050 for individuals who file joint income tax returns in 2020, and $ 518,400 for individuals who declare as unique contributors.
Regarding dependents, a non-refundable credit of $3000 is currently available to cover 20-30% of costs related to taking care of a child under 13 years of age or $6000 for two or more, this amount if gradually reduced for families with an income above $43,000.
According to the plan of the President-elect, the tax cuts from the existing Tax Cuts and Jobs Act (TCJA) created in 2017 will likely be revoked and the maximum federal tax rate of 39.6% will be reinstated.
Biden is also proposing an increase in credit for dependents, with the maximum credit amount being $ 8,000 for one child or $ 16,000 for two or more, with the credit repayable and gradually phased out for families with an income between $ 125,000 and $ 400,000 .
2 – Corporate Taxes
TCJA reduced the corporate income tax rate from 35% to a fixed rate of 21% and eliminated the alternative corporate minimum tax.
President Biden’s proposal would increase the income tax rate from 21% to 28%, therefore creating a middle ground between the current rate and the maximum of 35%, which was used during the Obama administration.
A new form of alternative minimum tax would also be implemented that would essentially give companies two options: pay most of their regular corporate income tax or pay a new minimum tax of 15% on global accounting revenue.
3 – Fees on partnerships, corporations and individual companies (pass-through or flow-through)
According to existing legislation, several companies are eligible for deducting qualified commercial incomes of up to 20%, which results in a reduction from 37% to 29.6% in the effective tax rate on the taxpayers’ commercial income.
Biden’s suggestion would be to take away the tax benefits associated with a qualified deduction from commercial incomes for those who raise over $ 400,000 a year. The result would be an increase in the commercial tax rate from 29.6% to 39.6% in these cases.
4 – Labor charges
Current tax legislation calls for the collection of social security taxes (12.4% – half from the employer, half from the employee) and Medicare (2.90% half from the employer, half from the employee) – the health system managed by the United States government – both for the employer as well as the employee.
In addition to these taxes, an additional tax of 0.9% is collected from self-employed workers which results in an increase of 3.8% in employer or collective/self-employed worker rates, totaling a Social Security and Medicare tax of 16.2%.
With Biden’s new proposal, the base salary ceiling (US$ 137.700) for Social Security taxes for people with high income, defined as those who make more that $ 400,000, would be eliminated. These changes to Social Security and Medicare taxes will be applied to employees and self-employed individuals who own an individual company or are partners in a partnership.
It is still unclear whether salaries between $ 142,800 and $ 400,000 would be subject to additional income tax or whether there would be a “transition period” before the higher rate would be applied to individuals with taxable earnings in excess of $ 400,000 .
5 – Capital gains and qualified dividend income
According to current law, taxpayers are subject to progressive income tax rates on capital gains and qualified dividend income. The rates for long-term capital gains are 0%, 15% or 20%, depending on the income tax range of each individual. In addition, a net investment tax is charged at a rate of 3.8% for those with a high volume of income, which raises the maximum total tax rate on long-term capital gains to 23.8%.
In Biden’s plans, the capital gains tax rate would rise to 39.6% for taxpayers with taxable income of $ 1 million or more, in addition to the net investment tax of 3.8%. Taxpayers with revenues above $ 1 million would automatically be subject to an effective rate of 43.4%.
6 – Taxes on inheritance
Tax inheritance is currently subject to a progressive rate scale that goes up to 40% and is applied on the owner’s death after an exemption grant of up to $ 11.58 million per taxpayer. In the current scenario, beneficiaries are entitled to an increase in the tax base of all inherited assets made on the valuation date of death or on the alternative valuation date.
Biden intends to reduce the exemption to US$ 3,5 million per taxpayer, in addition to increase the maximum property tax rate to 45%. Another measure for the president elect involves eliminating the practice of allowing an increase in the tax based on the date of death or on the date of alternative assessment.
7 – Manufacturing and business incentives
There exists tax incentives in the USA for affordable housing, programs that aim to reduce fossil fuel use and increase the use of alternative energy, to hire individuals qualified for job opportunity tax credit and to hire people with disabilities. Credits are also available to employers who provide child care onsite to facilitate the routine of employees who are parents.
Biden expresses full support for the existing programs, but intends to add a new tax credit focusing on manufactured goods to the group. Another idea of the president-elect is to impose a tax fine on companies that do business abroad in order to resell those same products or services again in the United States.
Faced with so many possibilities for change, it is necessary to seek solid strategies to get through this moment of transition with more security and tranquility. Follow our announcements to keep up to date on the subject and count on the Drummond Advisors team to assist you!
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