What’s in President-Elect Joe Biden’s tax plan? Listen for a summary of the major tax changes that could be headed your way.
Justin: Welcome everyone to Taxes Made Simple. The only podcast that explains the tax issues that every entrepreneur and investor needs to know as well as the latest tax changes all in plain English. My name is Justin Kern. I'm joined by my cohost chase Birky, who is a personal friend of mine and CEO of Dark Horse CPAs.
Chase: Thanks Justin. I actually started a podcast a couple of years back called Taxes and Beer, and I'm really excited to get back in it with him and share with you guys some incredible information that you need to know about any tax changes coming up quick note on the format of this podcast, they meant to be short.
Sweet. To the point. Every episode is going to give you exactly what you need to know around any upcoming tax topic that might impact you. And to that end, we have a lot of tax changes that we need to talk about today. And I'm talking about the Joe Biden tax plan. So let's get into it. Chase. Good to see you, man.
How are you? It's great. It's great to see you too, man. It's been a while and uh, quite honestly, I wish that I had a beer in front of me right now, but uh, I guess we'll have to go sands it's okay. It's okay. We'll have a beer after, but let's, let's dive into this. So I've heard a bit about the Biden tax plan, being bad for people that are making over 400 K.
Here is this true? And can you elaborate a little bit. Unfortunately it is true. Uh, so if you're making over 400 K it's, it's not going to be the best time, uh, under the tax code, uh, as proposed by Biden's new tax plan. So he's talking about increasing social security taxes. Uh, you know, top tax bracket would increase by almost 3%.
Uh, itemized deductions are going to be kept. Uh, the qualified business income deduction is going to be phased out, maybe entirely taken away. Uh, so there's a lot of negative tax changes that are coming down the pipe for anyone who has taxable income of 400,000 or more. Well, let's dive into that for the listeners.
Okay, well, we'll take it step by step. Um, first you mentioned social security taxes are going up. How much are they going up? What is the impact? Right. So social security is a 6.2% tax on your wages. And the way that it currently works is that you only pay that tax up to about 137 or 138,000 of wages, then all of your wages beyond that don't have any of that social security tax on top of it.
However with Joe Biden's tax plan. What we're talking about here is going to create what's called a donut hole where you'll still have that same 6.2% on your first hundred and 38 K of income. Then there's going to be nothing between 138 and 400, but then after you get above 400 K of wages, then that 6.2% kicks back in and goes essentially for unlimited amount of wages.
So, you know, once again, if you're above 400,000 in income, you know, it's going to be a painful spot. Also, it's going to hit the employer too, because that 6.2% has an
employer component that will kick in as well. So if you're making over 400 K not only are you going to be paying more in social security taxes, but also your employer is as well.
Um, and if you're, self-employed, you're going to have to eat both sides of that. So that's going to be a rather painful change that, you know, once it comes down the pike, uh, that hits anyone earning over 400 K geez. Yeah. You know, I always thought I was wondered personally, how they are going to keep up with social security payouts, you know, everyone's living a little longer.
Right. And you're sitting there trying to figure out how to, how to sustain, I guess this is Biden's way of saying here's how we're going to backfill all of our social security payouts. Right. Okay. Okay. So that's number one. Number two was tax increases. What, what is the increase in the tax rate and what is the impact?
Right. So a couple different rates are going to be going up first and foremost is the individual top tax rate. As I mentioned for anyone earning over 400 K, it's going to jump from 37% to 39.6%, uh, for corporate taxes, which are currently a max tax rate of 21%. That's going to be increasing to 28%. Um, and then another thing that's really going to be thorny for anyone earning in this case over a million dollars.
So not the 400 K Mark we've been talking about, but if you're earning over a million dollars, your long-term capital gains, which previously were taxed at a maximum of 23.8% are going to be taxed as ordinary income, which means that that. Those long-term capital gains are gonna be taxed at up to 39.6%.
Eh, you know, whereas, you know, you're talking about a 16% increase from where the current levels are. So this is going to take away a lot of incentives for holding stock for the long-term because short-term, and long-term at that income level would be treated the same. I mean, that, that sounds like a substantial impact for a lot of different industries.
I mean, I can't imagine being a hedge fund owner. And looking at that and thinking that's going to be a good change. Right, right. Biden Biden will definitely come for those guys. That's for sure. Yeah. Uh, well, okay so, well that, those two things sound negative, but let's talk about itemized deductions.
There's gotta be some. Some silver lining there, right? Nope, no silver lining. Unfortunately I got more bad news here. So once again, if you're earning over $400,000, uh, the tax benefit of your itemized deductions is going to be hampered by two different provisions, uh, at least as promulgated by this plan.
So. The first issue is going to be that, uh, your tax benefit is going to be capped at 28% for anyone once again, earning over 400 K. So that means that you know, where you'd normally get the tax benefit of your marginal tax rate, which if you're, you know, earning over 400 K is going to be that 39.6%. So unfortunately, Yeah.
Instead of getting that 39.6% benefit for every dollar, you know, that you're itemizing, you're only going to get a 28% benefit and that's across the board. It's not
progressive or anything like that. So you're basically taking an 11% haircut, uh, on your itemized deductions. And on top of that, they're talking about.
Reinstating the Pease limitation, which not a lot of people are familiar with, but essentially what that does is for anyone over a certain income level, it reduces the itemized deduction benefit by 3% for every dollar earned over a certain threshold. Which in this case, once again, they chose 400,000. So as an example, if you had $500,000 of taxable income, your a hundred thousand over that 400, so 3% of that 100 is $3,000.
Your itemized deductions are going to be reduced by in that case $3,000 on top of the fact that you're already limited, you know, by that 28% limitation I just spoke about. So theoretically as you're earning more and more, I mean way above 400,000. You could get to a point where you're not getting any benefit from any itemized deduction, if it's going to reduce by 3%.
Yeah. At a certain point. Yeah. There's, there's a, uh, you know, a point where you'd actually take the standard deduction because your itemized deductions would totally be, uh, negated by that 3%. Okay. Well, let's talk about next. The standardized deduction is 20% right now, correct? So actually we're talking about the qualified business income deduction here, but yes, you're right.
20%. And essentially what's changing here is that once again, if you're making over $400,000 more bad news is that this is going to be phased out. So this is regardless of whether you're qualified business. Uh, so even if you're qualified, as opposed to. Specified service, which you know, is a big debate. Uh, you know, if you're above $400,000 of income, you're going to get phased out.
And that's even if you have the salary and wage requirement, as well as, you know, any fixed assets that allowed you to take that deduction beyond certain income levels, they're going to totally phase that out for people earning over $400,000. You know, I've learned, I thought about this. When we were going through, you know, some of these changes and it really makes you, it really discourages you from, from a goal of trying to earn a certain amount for, you know, your livelihood.
You know, at some point you actually get hit so hard that, you know, it's that catch 22, you know, you don't want to get that extra $2,000 raise if you ever at that point, because you get taxed so hard once he hit 400 K, right. I mean, that's, that's the reality. Well, I mean, I would pepper that with, you know, there's very few scenarios, almost no scenarios where you take home less money by earning a certain dollar more, uh, you know, unless you're in the low income, you know, brackets where there's earned income tax credits and other things that are kind of, you know, more of a binary thing where you either get the support or you get the tax credit or you don't, uh, you know, but for anyone.
But that's earning six figures, generally speaking. I mean, almost across the board, you know, while you might have a bigger tax burden as your income increases, you're never going to be in a worse net of tax position by earnings. Very positive, very nice. Had to had to pepper something in there. Thank you.
Thank you. I appreciate that. Cause I'm sweating over here thinking about how I'm ever going to. Make it work. Okay. Well, that was all, a lot of negative stuff. There has to be some benefits, and we've always talked about people making over 400 K what's happening to the people that aren't making 400 K.
Right? So there are a number of positive provisions, you know, that are worth highlighting here. Uh, number one, being the child tax credit, that's going to be increasing from $2,000, a child to $3,000. Uh, plus they're throwing in a $600 bonus for any children under the age of six. Another positive, uh, tax provision here is first time home buyer tax credit is being reinstated.
Uh, and that's going to be good for up to $15,000. Uh, another tax credit related to children is the child independent care tax credit. Uh, that under current law is a maximum of $2,100, uh, that you could get if you had enough qualified expenses under Biden's tax plan, that would actually increase to up to $8,000.
So almost a fourfold increase there. Uh, there would also be a renter tax credit that would be essentially trying to balance, uh, what your rent and utilities are to get it to a place where after you take in the tax impact of this credit would be a maximum of 30% of your income. Uh, one other area too, is that.
We're talking about the 26% tax credit for contributions to retirement accounts. Uh, and that would be true across the board, which would negatively impact anyone who is out of tax bracket above that amount. Um, but anyone below that amount is going to be giving, you know, a hand up, uh, with that tax benefit.
That sounds positive. For individuals. Yeah. So if you have a lot of kids, it helps right now. Indeed it does. Okay, good. Um, so what about businesses? We talked about individuals. Um, you mentioned that the corporate tax rate was going to increase what other changes may impact businesses under Biden's tax plan.
Right. So there's a number of things out there that don't have a ton of specificity to them, but I'll kind of give you the high level items. You know, some of them I'm not even gonna address because, you know, for example, there's a minimum tax rate of 15% for corporations with profits greater than a hundred million dollars.
Uh, I don't know about you, but there's not too many businesses I know of that have profits of a hundred million maybe revenues, but, uh, so. Well, we'll ignore that for the purposes of this conversation. Uh, but one of the things that's in there is increased taxes, uh, to small businesses for adopting retirement plans.
So once again, you know, trying to incentivize, uh, the provision of retirement accounts, uh, for employees, you mean increase tax credits for small businesses. Exactly. So the cost for administering those plans, you know, are going to generate larger tax credits in the currently do got it. Okay. Uh, another area would be, uh, expanding renewable energy tax credits.
Obviously that's always a democratic, uh, priority. So that's, uh, that's in this plan as well. Another area is a 10% Sur tax on corporations that are offshoring jobs, you know, that are creating goods and services that are then sold back to the U S uh, obviously there's a lot of businesses that do that to increase their margins.
Uh, but you know, the, the policy here that the Biden administration is contemplating is keeping jobs in America, obviously. So on top of that, they're also talking about a 10%, uh, tax credit on goods made in America. Uh, and not only would this be, you know, a refundable tax credit, but it would be an advanced tax credit.
So you'd get that before you even filed your tax return. Well, that's nice. So you're, you're producing goods in the U S. You're going to get a tax credit for that. So you're trying to bring jobs back to the U S with that tax credit as well. Exactly. Yep. Well, that's very, that's positive. That's very positive.
Um, okay. So next on the list is the death tax or inheritance tax, you know, family members pass on what's happening. What's impacting. I know that this is a big pain point for us. For one party in particular that they, they, they seem to really want to make sure to triple tax you when someone passes on. So w w what's going on there?
Right. So this is only going to get more painful. Uh, so couple things are happening here. Uh, probably the biggest area, you know, that caught most people's eyes. Is that the, uh, amount of your exemption, you know, from the total value of your estate right now is about 11 and a half million dollars. Meaning that if you have an estate that's worth.
You know, $11 million. None of it's going to get taxed because it's below the exemption amount, but under Biden's tax plan, that is actually going to revert to 2009 levels at 3.5 million. So in that same scenario where you have, you know, an $11 million state, uh, you're going to have to actually pay tax on everything above 3.5 million.
So 7.5 in that case, And whatever you do have to pay tax on is going to be taxed at 45%. Uh, the current rate is 40%, so that's bumping up by 5% and a really interesting provision that they're adding in here too, is that for deceased taxpayers that had income of over $400,000. Uh, Biden's tax plan would tax any unrealized capital gains at the time of death and unrealized, meaning it's just a paper gain, you know, you haven't actually sold the stock.
So that's going to be a big one. Um, on top of the fact that, you know, you could get above a million dollars easily, which then puts those gains, you know, at that 39.6% tax rate. So between all of these changes, We're talking about an estate tax rate that could get up to 67%, uh, which is almost double the current effective rate for States, uh, dive into the
unrealized capital gains that the date of death, just, just for two seconds.
So I understand that you're telling me grandpa passes away. He has a million dollars in stock with some company. It doesn't matter. Just a million dollars in stock goes up and down every single day on the date of death, they look at what the number was that day and they say you owe us 39% of that amount.
Yeah, as it's currently written, that's exactly how it would work. Uh, obviously, you know, if a provision like that came into reality, uh, you know, they're going to probably create some nuance where you'll have maybe an alternate valuation date, you know, six months after death or something like that. You know, some of the same provisions that they do with the step of a basis, uh, for inherited property.
Uh, but the way that they're talking about it right now, what you just said is exactly correct. It just seems like unnecessary stress. Can you imagine, you have to think about all that once a loved one passes on, what do you have to think about is how you're going to liquidate all their assets today, just to make sure you can cover the taxes.
Yeah. I mean, we think about that sort of thing all the time. So unfortunately I can't imagine that, but I hope that I hope our taxpayers for the most part don't so assuming that there's not some crazy. You know, reversal and the electoral college and Trump stays in office. Um, when are these changes going to affect?
Right. So that's really a fluid situation right now because, uh, the control of the Senate is really going to dictate, you know, the speed and the scope of, you know, how these changes come down the pike. So right now there is a runoff that will be happening on January 5th. I believe in Georgia and it's for two Senate seats.
And if Democrats were to win both of them, they would control the Senate. If Republicans win just one. The no control of the Senate. And the reason that's so important is because if the Democrats control the Senate and the house, you know, and the white house, you're going to be talking about, you know, kind of a blank check, uh, as long as they don't have dissent amongst their ranks, you know, to put out all of these, uh, tax provisions that they've been contemplating.
However, if Republicans control the Senate, then you're going to see a more delayed, um, as well as, you know, a bipartisan sort of tax regime, which that's kind of the best case scenario from our standpoint, because you'll see changes, but they won't be major. Uh, and you know, they're not going to happen all at once, you know, cause they're going to have to have that.
Bi-partisan. Uh, agreement, which as we know is a little bit difficult to come by these days, however, you know, to have a Democrat controlled Senate, you know, that's, that's going to create massive changes in the tax code that, you know, are going to be negative for anyone of, you know, uh, any sort of affluence or high net worth.
So what should these guys be doing right now? There's, there's a little bit of uncertainty. There's a lot of dire information. Coming up. Um, you're making 400 K a year right now or more, what should you be doing? So, what we know for sure is that taxes are going up in the future. We just don't know when and, you know, the, the, the total scope and the breadth of those changes.
So, you know, our general advice right now is, you know, play with the tax code, you know, and if you can push income forward to 2020, You might want to do it as long as it doesn't push you up to brackets that make it more painful than it needs to be. Uh, same
thing with deductions. If you can defer those deductions from 2020 to future years, you know, things like depreciation, you know, maybe not taking 100% bonus, uh, then you know, you might find yourself in a better spot there because that tax rate could be meaningfully higher.
Uh, so that deduction could mean a lot more at that point. So really, you know, you're just talking about pushing forward, taxable income, you know, kind of in all scenarios, uh, because what we know, you know, is that we're just going to have a, you know, higher tax regime going forward. Um, you know, you do want to be careful though, in terms of whether you're pushing yourself into.
You know, a level of income that even with a higher tax regime that, you know, would still be more burdensome than it would otherwise, you know, but these are the sorts of conversations that you absolutely need to be having with your CPA. Um, you know, and that's really kind of the crux of all of this is, you know, being able to run projections, understand, even though we don't know what the future is going to be, you know, This is what it could be today.
If we, you know, move forward that income, uh, you know, so that you can really run a cost benefit analysis with those numbers. Sounds like a lot. It sounds like a lot, but I know you guys, I mean, look, you do this all day. So anybody who works with you is in good hands right there. That's why I'm with you guys.
So we have a lot of topics that we are going to dive into in more detail on subsequent podcasts. And we want to make this a weekly thing. Where we kind of unpack some key components, whether it's for individuals or businesses and their tax planning and sort of tax needs and what they can be doing to help even with all the changes coming up right.
Or what you could be doing to help with all the changes coming up, I should say. So I'm, I'm excited. I'm excited to kind of dive in and see what we can, we can come up with. And I know we have some guests hosts that are going to come on too, as well. Other members of the, of the dark horse teams is that right?
Absolutely. Yeah, so really the, you know, the concept and the format here is going to be for our dark horse CPAs, who work directly with our clients, uh, to share areas of their deep knowledge, uh, you know, for everyone's benefit. And if it's, uh, if you're liking what you're hearing, you'll be able to engage directly with those folks.
We'll have all of their contact information available for you. Perfect. Well, we can wrap this one up. Thank you, chase for joining. And I'm excited to do this every week. And we'll have some more, I don't know, interesting topics to dive into and, you know, hopefully one of the biggest things I enjoy when I, to, by the way, I'm going to do a little sidetrack here.
One of the biggest things I enjoy about working with you guys is the exposure to what other individuals are doing. Obviously not sharing too much information other than the
fact that this is what we're seeing, and this is what we can be doing to help. I find that to be one of the most beneficial parts of our relationship.
And I'm super excited to share some of those little details with the audience. Absolutely. Well, we love having you as a client. So the feeling is more than mutual. Thank you, chase. I'll let you go. And until next time, and now for the disclaimer, the content in the proceeding podcast should not in any way, be construed to be tax advice.
All tax laws are nuanced and thus are applied to each unique situation differently. Don't be a dummy IRS CPX. Preferably a dark horse CPA.