The Biden Administration Takes Aim at Wealth: 10 Proposed Tax Hikes Targeting Corporations and The Wealthy
A look at some of the Biden administration's tsunami of proposed tax hikes targeting corporations and the wealthy.
Here is a quick high-level overview of what you should be thinking about considering the Biden administration's tsunami of proposed tax hikes that would target corporations and the wealthy.
I will cover proposed Biden plans to tax wealth in America, including:
Increases to the Corporate tax rate
Increases to the Global Minimum Tax
Increases to the Top Persona Income Tax Rate
Increases to the Capital Gains Tax Rate
Increases to Social Security Taxes for Employers and Employees
Reducing the Benefit of Itemized deductions
Elimination of Like-Kind Exchanges
I will also cover many other areas that could have a significant impact on high-net-worth individuals. If you are someone with significant assets, say, $2 million or more in net worth, keep reading. Let's get started.
#1 - Biden’s Proposed Increase to the Corporate Tax Rate
OK, so first let us talk about the corporate tax rate changes. The Biden administration recently announced The American Jobs Plan, which is an infrastructure bill aimed at spending trillions of dollars on roadways, bridges, etc. The bill also includes a lot of other priorities that the Biden administration thinks are important. To offset the high price tag, they have proposed a significant number of corporate income tax rate changes that should raise a lot of revenue over a decade.
First, they have proposed raising the corporate income tax rate from 21% to 28%. While that seems like a significant rise in rates -- and it is -- the reality is that when President Trump came into office, the tax rate was 35%. So, it is still significantly lower than it was when President Trump came into office, should they get the entire increase passed through legislation and signed into the tax code.
#2 - Biden’s Proposed Increase to the Global Minimum Tax
Another proposal is a 21% global minimum tax calculated by each country by country. US corporations would pay 21% on overseas income in each country in which they do business. In addition, they proposed an alternative 15% corporate minimum tax on corporations with a global book income of $100 million or more. Many large corporations would end up paying at least a 15% tax rate on the book income that they show to investors.
If you are a corporate taxpayer and you are facing these kinds of significant rate hikes, what can you do about it? Well, the only thing that makes common sense would be to defer your taxes to later years when hopefully we will have folks that decide to reduce rates again. These kinds of high rates do not tend to stay around for a very long period of time. You would want to outlast the government by creating a deferral.
#3 - Biden’s Proposed Elimination of the IRS Section 199A Deduction
Another code section that the Biden administration is seeking to change is the recently enacted Section 199A deduction. This deduction provides for a 20% passive deduction for qualified business income. The Biden administration is proposing phasing it out for taxpayers who make more than $400,000 of adjusted gross income.
If you are making more than $400,000, then you're going to eventually end up not being able to take advantage of this Trump-era provision. The 199A deduction is a below-the-line deduction available to owners of Sole Proprietorships Partnerships, S-Corps, and some trusts and estates engaged in a qualified business.
The only solution for a phase-out of the 199A deduction would be to be creative in locating additional deductions that could create the same kind of offset so that your taxes remain stable.
#4 - Biden’s Proposed Increase on the Top Persona Income Tax Rate
The Biden administration is also raising the top personal income tax rate. The current rate of 37% will be raised to 39.6 % for people making more than $1 million. This is not a massive increase in actual rates, but it will raise a significant amount of revenue.
The only solution for the high-end taxpayers would be to undertake a strategy for deferring the income to later years when, hopefully, the rate will decrease; or doing a conversion strategy which would take some of the ordinary income and turn it into a capital gain. The idea would be to defer the income until capital gains rates are low again, given that the Biden administration is also proposing raising the capital gains rate significantly.
#5 - Biden’s Proposed Increase on the Capital Gains Tax Rate
The Biden administration is going to propose a capital gains tax rate increase that's very significant. Currently, capital gains are taxed at a preferred rate of 20%. The Biden administration would like to raise that to the top income tax rate currently at 37%. They have also proposed, of course, that the rate increases to 39.6% for taxpayers making more than $1 million in income.
The capital gains tax rate is a preferred rate in which assets that are sold at a gain that have been held for more than a year are taxed at a preferred rate of 20%. The Biden administration is proposing that the rate for people that make more than $1 million in income rise to the top level of taxation for that class. For example, right now, the top tax rate is 37%. The Biden administration is proposing it be raised to 39.6%. If it were successful, capital gains for this class of taxpayer would be at 39.6% rather than the 20% it is today. That is an incredibly significant increase.
#6 - Biden’s Proposed Increase on Social Security Taxes for Employers and Employees
The Biden administration is also proposed raising the Social Security tax rate for employers and employees. Currently, Social Security taxes are applied to the first $137,700 of wages/income, and that number is inflation-indexed each year. The Biden administration is planning on over $400,000 being taxed at an additional 12.4%. In application, this means there is no Social Security tax on the income between the current cap on Social Security, which is $137,700, and the $400,000 in which the new tax rate would apply.
#7 Biden’s Proposed Reduction on Itemized Deduction Benefits
The Biden administration is also proposing reducing the benefit of itemized deductions such that nobody receives a benefit of more than 28%. Itemized deductions are things like:
- real estate taxes,
- state taxes,
- home mortgage interest,
- mortgage insurance,
- charitable gifts,
- casualty theft losses, etc.
In application this is a reintroduction of the “Pease” limitation on itemized deductions, reducing itemized deductions by 3% for each dollar of income in excess of $400,000.
"The Pease Limitation put a cap on how much certain taxpayers could claim in the way of itemized deductions before it was repealed when President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law on December 22, 2017."Bird, Beverly. “How Did the Pease Limitation Work (and Why Was It Repealed?).” THE BALANCE [New York, NY], 17 Sept. 2020, www.thebalance.com/the-pease-limitation-and-why-it-was-repealed-4163498.
#8 - Biden’s Proposed Steep Reduction for Estate Tax Exemption
The Biden administration has also made significant proposed changes to the estate tax code. For example, the estate tax exemption is being proposed to be reduced from $11.58 million to $3.5 million. That is a giant reduction in the estate tax exemption. That will bring an enormous amount of estates into the estate tax world, wherein most estates were not previously. It increases the top tax rate for estates to 45%.
#9 - Biden’s Proposed Elimination of The Step-Up-In-Basis Benefit to value assets in the estate.
Most importantly, there are proposals both in the House and the Senate right now to eliminate the Step-Up-In-Basis for beneficiaries who receive $1 million in either income or benefit or property during the year that the descendant passes away. Today, when someone passes away the value of the assets in the estate that a beneficiary receives is "stepped up" to the current fair market value of the asset.
So, for example, if you own some investment property that is worth $1 million, but only costs you $500,000, you have a $500,000 gain in that property if you sold it. But because the descendant passes away, it's treated as though it has stepped up to the full $1 million. You pay no tax on what would otherwise be a capital gain, the capital gains to the sale of the asset.
Now that we understand what the step-up in basis is, let us look at the proposal that the Biden administration has on the table in the Senate and in the House. They are proposing that beneficiary's making $1 million dollars in the year of the date of death of the descendant do not get the step-up-in-basis and instead must pay tax on the assets as though they were sold on that date in the amount of the difference, between the basis of the descendant and the amount that is a fair market value of the asset.
If you combine this step-up-in-basis elimination with the higher capital gains rate that the Biden administration is proposing, there could be as much as an $80 billion increase in annual taxes.
#10 - Biden’s Proposed Elimination of Like-Kind Exchanges
The Biden administration has also proposed changing the rules with respect to Like-Kind exchanges. These exchanges are typically where you have property held for business, often real property, and you have a sale of a one piece of property and a purchase of a like-kind piece of property on the other side. And you do not end up paying capital gains tax or you do not end up paying income tax on the sale of the asset.
It rolls into the new property and you take the same lower basis that you would have in the initial property that was sold into the new property that is acquired. The Biden administration has decided to propose that taxpayers making more than $400,000 can no longer make use of like-kind exchanges.
That is a quick look at some of the tax proposals on the table that could have a huge impact on your wealth. In future blogs, we will start to look at each of the areas that give you some wealth protection strategies to think about.
If you are a high net worth individual or advisor and looking for tax strategies and tax law insights for protecting your wealth, contact us at CantleyDiectrich.com.
Written by Beckett Cantley Author, Professor of Tax Law, and Senior Partner at the Cantley Dietrich law firm.
Article Authored By Beckett Cantley and Geoffrey Dietrich
Since his election, there have been non-stop court battles over President Trump’s refusal to release personal financial information. Several House Committees have sought President’s Trump's personal information on multiple different grounds, each claiming a valid legislative purpose for needing the information. President Trump argues the subpoenas do not serve a valid legislative purpose and that the House Committees are seeking this information to release to the public. The various sides have been locked in legal battles for years, with no end in sight.
This article is discussing
the same lawsuit discussed elsewhere in this issue, Shivkov v. Artex Risk Solutions, Inc., Case No. 2:18-cv-
04514-GMS (D. Ariz. Dec. 6, 2018), but references a different plaintiff. It should be noted that Mr. Cantley
has a cocounsel arrangement with the tax shelter practice of Loewinsohn Flegle Deary Simon LLP, counsel
for the plaintiffs.
Beckett G. Cantley teaches international taxation at Northeastern University and is a shareholder in Cantley Dietrich PC. Geoffrey C. Dietrich is a shareholder in Cantley Dietrich PC.
In this article, Cantley and Dietrich discuss two recent Tax Court opinions and their implications for section 831(b) captive insurance companies.
Beckett G. Cantley, The Tax Shelter Disclosure Act: The Next Battle in the Tax Shelter War, 22 Va. Tax Rev 105 (2002). Summary. This article analyzed the most important sections of the draft “Tax Shelter Disclosure Act” (“TSDA”), including the significant amendments to the Internal Revenue Code that would have been made by the TSDA. Two of the main provisions of the TSDA define what constitutes a “tax shelter” and raise the penalties associated with tax shelters. The article synthesized and analyzed the criticisms of several important organizations who issued public comments on the legislation and provided policy assessments of its likely benefits and burdens.
Beckett G. Cantley, Taxation Expatriation: Will the Fast Act Stop Wealthy Americans from Leaving the United States?, 36 Akron L. Rev. 221 (2003). Summary. This article analyzed the recently enacted legislative solution to the problem of wealthy American citizens expatriating to a foreign nation to avoid taxes. The article also discussed the last major attempt to prevent tax expatriation through the enactment of IRC Section 877 and the fact that Section 877 was being easily circumvented by tax expatriates and their advisors. To stem the tide of tax expatriation, certain tax provisions were added to the Foreign and Armed Services Tax Fairness Act (“Fast Act”) that would bolster the previsions existing under Section 877. Under the draft Fast Act, two of the ways tax expatriates will be punished are by (1) treating all of the tax expatriate’s holdings as if they had been sold the day before expatriation, thereby triggering all inherent capital gains on the holdings and (2) requiring that estate taxes due from the death of a tax expatriate be collected against a domestic heir of the tax expatriate, rather than the tax expatriate’s estate. The article analyzes the operational and policy implications of the FAST Act, and concluded that while it adds additional deterrents to tax expatriation, it cannot eliminate it.
Beckett G. Cantley, Corporate Inversions: Will the REPO Act Keep Corporations from Moving to Bermuda?, 3 Hous. Bus. & Tax. L.J. 1 (2003). Summary. This article discussed the attempted legislative solution to the issue of “corporate inversions.” A company undertakes a corporate inversion by forming a company in an offshore tax haven and then having the US based company become a subsidiary of the offshore company. The result is that the offshore tax haven does not tax the offshore company on its profits and the US based company is not taxed on its offshore profits. In addition, the US based company may also undertake an “earnings stripping” program to have significant US income redirected to the non-taxable offshore company. The article discussed draft legislation called the “Reversing the Expatriation of Profits Offshore Act” (“REPO Act”), which would have amended the IRC in several significant ways to prevent companies from undertaking corporate inversions. The article analyzed the draft REPO Act from an operational and policy perspective and concludes that the draft REPO Act will likely prevent corporate inversions.
How Long Must One Stay in the USVI to be Considered a ‘Resident’ to Qualify for the 90% Residency Tax Credit?
Beckett G. Cantley, How Long Must One Stay in the USVI to be Considered a ‘Resident’ to Qualify for the 90% Residency Tax Credit?, 13 J. Transnat’l L. & Pol’y 153 (Fall 2003). Summary. This article analyzed the length of stay requirement for obtaining residency in the United States Virgin Islands (“USVI”). Residents of the USVI generally file their tax returns with the USVI tax authorities rather than the IRS. Such residents also generally make all tax payments to the USVI taxing authorities. Residents of the USVI can be eligible for as much as a ninety percent (90%) tax credit on their personal income or investment income from ownership in certain business entities, by taking advantage of the Economic Development Commission program for investment in the USVI. These credits have been in existence for almost fifty (50) years and are filled with historical precedent. These credits are also safely guarded by many members of the US Congressional Black Caucus. The article concluded that it is clear that a person must reside in the USVI on the last day of the tax year to be considered a “resident”. However, unlike the United States, the article concluded that there does not appear to be a one hundred eighty-three (183) day residency requirement to be considered a resident of the USVI. The article further concluded that there are a series of possible residency requirements that depend on the facts and circumstances of each case. The article discussed many of these facts and circumstances and provides a policy argument for which ones make the most sense.
Beckett G. Cantley, The New Congressional Attack on Offshore Rabbi Trusts, 5 Or. Rev. Int’l L 5 (2003). Summary. This article discussed certain tax provisions that were contained in the draft National Employee Savings and Trust Equity Guarantee Act (“NESTEG Act”). These provisions would have made funds held in offshore rabbi trusts immediately subject to US income tax to the beneficiary of the offshore rabbi trust. The estimated result to the US Treasury Department would have been a significant increase in tax collection. Offshore rabbi trusts have become common vehicles for US persons employed abroad by foreign companies to set aside retirement funds. In addition, many offshore hedge fund managers have used offshore rabbi trusts as a means to defer income from current taxation. This article discussed the previously proposed legislation, the likelihood of such legislation’s passage in the next Congress and the legal doctrines and tax policy implications involved in making such a change in tax policy.
The New Tax Shelter Opinion Letter Regulations: Cutting Back a Client’s Ability to Rely on the Advice of His Counsel
Beckett G. Cantley, The New Tax Shelter Opinion Letter Regulations: Cutting Back a Client’s Ability to Rely on the Advice of His Counsel, 18 Akron Tax J. 47 (2003). Summary. This article analyzed certain Proposed Treasury Regulations (“Opinion Regs”) relating to the issuance of tax opinions by counsel on matters that are “reportable transactions”. The Opinion Regs were the seemingly final piece in Treasury’s offensive against tax shelters. The Opinion Regs put up significant barriers to a client being able to rely on advice of counsel in tax shelter matters. The main question this article discussed was whether the inability of a client to rely on a client’s counsel on such complicated matters as tax shelters is good public policy. This article answers the question by concluding that it is not good public policy.