What’s Ahead for Taxes and Charitable Giving Under Biden?
Now that the election is over, and control of the Senate is settled, there’s more clarity on the tax reforms we can expect to see coming.
The tax plan in President-elect Biden’s campaign platform was far ranging, including the following measures to increase government revenue.
Individual and Corporate Tax
- Under a Biden plan, those with taxable income over $400,000 would see their individual rates go to 39.6% from the current 35% to 37%.
- Another proposal suggests a 12.4% Social Security payroll tax on wages over $400,000.
- The corporate tax rate would jump from 21% to 28%.
Capital Gains Tax
- Increase capital gains tax from 23.8% to 39.6% for those with income over $1 million.
- Eliminate the current step-up in basis on inherited assets.
- Drop the current estate exemption from $11.18 million to $3.5 million.
- Increase the top estate tax rate to 45% from the current 40%.
- Biden would propose a 28% cap on the value of itemized deductions for those with income over $400,000.
While it is unlikely that every one of Biden’s proposals will pass, the 50-50 split in the Senate certainly increases the likelihood that significant legislation may move ahead. For instance, Garrett Watson of the Tax Foundation, interviewed for a Barron’s article on Biden’s tax policies, suggests that raising the corporate tax rate to 28% and the top marginal tax rate to 39.6% are likely to succeed. Watson also suggests that reverting back to the prior $3.5 million estate tax exemption is likely.
Will Biden’s proposed 28% cap on the value of itemized deductions pass? That is less clear. This 28% cap was proposed during the Obama years and never passed, but there’s an increased appetite for getting deals done. There’s little doubt that the 28% cap will have the most dramatic impact on charitable giving, particularly when coupled with higher tax rates in other categories.
(A word of clarification on the nature of the proposed 28% cap. Taxpayers will still be able to itemize deductions up to 60% of adjusted gross income. But the 28% cap lessens the value of the deductions for those making more than $400,000—because they’re in a tax bracket higher than 28%. They’re currently taxed from 35% to 37%. That 7% to 9% difference in tax rate is the value that would be lost to these high-income itemizers. They would lose even more value if their tax rates jumped to 39.6%.)
On the other hand, cutting against a new 28% cap on deductions is an increased desire to encourage charitable giving in a COVID environment that has produced hardship for Americans across the board. A 28% cap may not be favorably viewed in that light.
In the next few months, we’ll see these proposals begin to come to light. While any tax reforms are unlikely to impact taxpayers in 2021, it’s important to be aware of what’s ahead and consider what adjustments you will need to make.
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Published January 8, 2021
Topics: Culture Commentary