A Look at Biden's Tax Proposals
With the election just around the corner, American tax policy faces uncertainty. The Tax Cuts and Jobs Act of 2017 ushered in the most significant changes to the tax code in 30 years. Depending upon the outcome, the 2020 election could significantly alter the landscape again. While details are slim, this post reviews Vice President Biden’s tax proposals, as posted on his campaign website and discussed during his time as a candidate. While campaign proposals are only that, it is important for farm businesses and their tax professionals to consider potential shifts as they seek to make informed business decisions in the days ahead.
Individual Tax Rates
Biden’s website states that his plan would not raise taxes on anyone making less than $400,000 per year. With that stated caveat, the Biden plan would raise the top individual income tax rate from 37 percent to 39.6 percent.
Capital Gain Tax
The Biden plan would raise the capital gain tax rate from a maximum of 20 percent to 39.6 percent for those with yearly income exceeding $1 million. Because it appears that the plan would not eliminate the 3.8 percent net investment income tax, the top federal tax rate for some capital gain would likely be 43.4 percent. This does not include state tax liability. The health care section of Biden’s website explains that this tax increase would be used to fund health insurance coverage for some Americans.
Note: It is unclear whether this nearly doubled rate would apply to the sale of business assets under IRC § 1231. With some exceptions, business assets held for more than a year are taxed at long-term capital gain rates. Even if the proposal extends only to capital gain flowing from the sale of assets not used in a trade or business, this new rate would apply to the sale of any farmland held as an investment.
Stepped-up Basis at Death
Biden has proposed eliminating the basis adjustment at death, meaning that heirs would receive a carryover basis on inherited assets, rather than a basis adjusted to fair market value. In other words, transfers at death would presumably be treated like lifetime gifts. The Biden website does not reference details on this proposal, but rather says only that “capital gains reform will close the loopholes that allow the super wealthy to avoid taxes on capital gains altogether.”
Note: Long-time tax policy has eliminated potential tax liability on asset appreciation and depreciation recapture at death by allowing heirs to take assets transferred at death with a basis equal to the fair market value of the asset at death. Altering this rule—often called the step-up in basis (although it can be a step-down as well)—would impact many Americans. The reach of the impact would depend upon the details. Would the elimination of the basis adjustment apply to assets comprising family businesses or farms? Would it apply only above a certain estate value? Would a recognition event be triggered at death or would the tax be due only if the assets were later sold by the beneficiaries? Would appreciation that occurred prior to the passage of any law be exempted from the new provision? These are just a few of many questions that have not been specifically addressed by the Biden plan.
Estate and Gift Tax Exemption
Although the Biden website does not provide details, Biden has stated that estate taxes should be “raised back to the historical norm.” He has also stated that we should restore the nominal estate, gift and generation-skipping transfer tax provisions in effect in 2009. This would include lowering the estate and gift tax exemption from $11,580,000 in 2020 per person to $3,500,000 per person ($7 million for married couples) and raising the maximum estate and gift tax rate from 40 percent to 45 percent. It has alternatively been suggested that Biden would seek to lower the exemption amount to pre-TCJA levels, which would be $5 million per person, presumably indexed for inflation.
Candidate Biden has also proposed eliminating the IRC § 1031 like-kind exchange for real property. This would mean that taxpayers could no long defer the recognition of gain from the sale of appreciated property by rolling the gain into the purchase of a different property. This tax deferral has long been allowed to encourage the free exchange of real estate and to allow those who are changing only the identity of their business or investment asset, not the value, to maintain the same economic position. Removing the like-kind exchange would mean that a taxpayer who exchanged one parcel of farmland for another, for example, would pay tax on the gain from the sale of the relinquished farmland and would acquire the new farmland with a basis equal to the full purchase price. The Tax Cuts & Jobs Act eliminated the like-kind exchange for personal property in 2018.
Note: The Biden website does not address this proposal specifically. Presumably, it is part of the overall “capital gains reform.”
Individual Tax Provisions
Biden’s website states that, if elected, he would seek to implement a number of changes to individual tax policies. The details are few, but the listed points include the following:
- Increasing the child tax credit to $3,000 per child for children ages 6 to 17 and $3,600 for children under six and making the credit fully refundable
- The child tax credit was increased from $1,000 to $2,000 in 2018 by the Tax Cuts & Jobs Act.
- Expanding access to refundable premium tax credits by requiring that families pay no more than 8.5 percent of their income on health insurance (this would be down from a maximum of 9.78 percent in 2020)
- Increasing the child and dependent care credit from $3,000 to $8,000 (up to $16,000 for multiple dependents) to help low-income and middle-class families pay for child care
- Offering a $5,000 tax credit for informal caregivers who are caring for an aging family member
- Increasing tax benefits for older Americans choosing to buy long-term care insurance
- Providing an advance first-time home buyer tax credit of up to $15,000
- Expanding the earned income tax credit to older workers
- Reenacting the Pease limitation on itemized deductions for those with more than $400,000 in income and restrict those deductions to 28 percent of their value.
- Disallowing the qualified business income deduction for those with more than $400,000 in income
Payroll Tax Provisions
The Biden website states that the Biden plan will require “Americans with especially high wages to pay the same taxes on those earnings that middle-class families pay.” The has been reported to mean that the 12.4 percent social security tax would be imposed on wages above $400,000 (including self-employment income). Presumably, the lower wage limit ($137,700 in 2020) would still apply as an initial ceiling, and the additional payroll taxes would only apply to income above the new upper limit.
Retirement Plan Changes
The Biden website states that he would seek to “equalize the tax benefits of retirement plans.” Although not detailed on the website, it appears this proposal would provide a refundable tax credit (instead of a deduction) for retirement plan contributions that would be paid into the plan as a matching contribution.
Corporate Tax Provisions
The Biden plan would raise the corporate tax rate to 28 percent. This amount is between the current 21 percent rate initiated by the Tax Cuts & Jobs Act and the 35 percent top corporate rate in place prior to 2018.
Note: The proposal does not detail whether this increased rate would apply as a flat tax on all corporate income, as the current rate does, or whether it would reintroduce income brackets and a phased-in tax rate increase like that which existed prior to 2018. Many small C corporations, for example, faced a tax rate increase with the Tax Cuts & Jobs Act change because of the change to a flat rate for all income.
In addition to the corporate tax rate increase, the Biden plan references several other provisions primarily directed at large corporations:
- Requiring a 21 percent minimum tax on ALL foreign earnings of United States companies located overseas. This minimum tax would apply to all income.
- Imposing a tax penalty on corporations that move jobs overseas and sell products domestically
- Imposing a 15 percent minimum tax on corporate book income
As noted above, campaign proposals often lack detail. This year is no exception. These references may be useful in seeking to understand the Biden tax proposals:
- The Biden Plan for Older Americans
- Biden Tax Plan: A Tale of Two Tax Policies
- Other Biden Proposals
- 2020 Democratic Platform
- Biden-Sanders Unity Task Force Recommendations
- October 15 Analysis from the Tax Policy Center
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.