2021 Tax Legislation: Changes on the Horizon?
Background: With the inauguration of President Biden and the recent election of two new senators from Georgia, the Democrats now control the White House and both houses in Congress, (albeit with small majorities in both the House of Representatives and the Senate). This has led to increased speculation as to the prospects for tax legislation this year, especially considering the detailed Biden tax program that was released during the 2020 campaign season and the discussions that many financial and tax advisors had with their clients this fall.
Biden Tax Proposals: In general, the Biden tax plan attempts to achieve a “more progressive tax code” and features several significant tax changes aimed at individual taxpayers earning more than $400,000. His plan would also expand certain tax benefits available to lower- and middle-income individuals.
The key components of the Biden campaign’s tax proposals for individuals include:
• Income tax rate: Increase from 37 percent to 39.6 percent for income over $400,000
• Capital gains and dividends: Treat long-term capital gains and qualified dividends on income above $1 million as ordinary income
• Social security tax: Impose 6.2 percent payroll tax on income over $400,000
• Deductions: Cap the value of deductions at 28 percent and restore Pease limitation
• Estate Taxes: Reinstate pre-TCJA exemption amounts and tax rates and remove stepped-up basis of assets at death
• Credits: Expand the Child Tax Credit making it fully refundable; increase the Earned Income Tax Credit; reestablish the First Time Home Buyer Tax Credit
Prospects for Tax Legislation in 2021: Because the Democrats have such slim margins in both the House and Senate and because generally all legislation requires bipartisan support to overcome the 60-vote requirement in the Senate, it is unlikely that any significant tax legislation can be enacted in 2021 other than through so-called “budget reconciliation.” Under budget reconciliation, a bill requires only a simple majority in the Senate (51 votes) for passage. Democrats will likely use this tool to achieve legislative wins on measures that don’t have broad bipartisan support, such as a boost in the minimum wage to $15 per hour (among other provisions from the Biden Administration’s recently-released “American Rescue Plan”), strengthening the Affordable Care Act, or some aspects of tax legislation. The year 2021 promises to be a busy one for the new Administration and the 117th Congress.
Many believe that the Biden Administration will pursue significant legislative proposals ahead of tax proposals, especially those that raise taxes or reverse provisions contained in the 2017 Tax Cuts and Jobs Act. Treasury Secretary Janet Yellen has stated that “in the short-term the emergency legislative package that includes refundable tax credits” is the top priority. She did, state however, that “longer-term proposals,” including requiring that families that make more than $1 million pay the same tax rate on their investment income” remains part of the Biden agenda. Donors and their advisors would be wise to keep an eye on proposals including those outlined above during the next several months, especially if economic conditions and the pandemic improve dramatically. JFNA will continue to provide relevant updates to Federation professionals.
For more information, contact Scott Kaplan, Foundation Director, at 786-866-8623 or [email protected].
