As in any country, the election of a new leader also means possible changes in tax policies, which is likely to happen under the new Biden administration. One of Pres. Biden’s key tax proposal is to revert the highest federal income tax rate for individuals back to 39.6%, which was the rate before the Trump administration had it reduced to 37%.
Still, any legislative proposals to change or modify the current tax laws have to be approved by Congress, before they can be enacted as laws. Since the ruling bloc in both the lower house (State Representatives) and upper house (State Senators) is the Democratic Party, to which President Biden belongs, the proposed reversal to the pre-Trump rate of 39.6% is likely to take effect starting tax year 2021.
Other Tax Policies that the Biden Administration will Propose to Congress
Inasmuch as taxpayers are now living in 2021, it’s important to know the likely changes that will impact the income that will be earned this year. Aside from the potential reversal of the top tax rate to 39.6%, other tax proposals that the Biden administration will submit to Congress, will include the following:
Corporate Tax Increase
The present Corporate Tax of 21% will increase to 28%. The Trump administration had slashed down a previous Corporate Tax of 35% down to 21% as legislated under the 2017 Tax Cuts and Job Act passed by Congress. The new Biden administration will propose to add back half, or 7% of the 2017 tax cutback (35% – 21% = 14% cut back in 2017.)
Minimum 15% Corporate Tax on Corporate Book Income
Institution of a minimum corporate tax payment of 15% if the corporate book income is $100 million and above. Reference to “corporate book income” denotes the income reported by companies to the general public; particularly for shareholders who are interested in evaluating the financial health and performance of a corporation. The book income reported is likely higher as the income presented in the financial statements is not for taxation purposes.
Reduced Value of Estate Tax Exemption
BIden will seek to bring down Estate Tax Exemption by 50%, which under the Tax Cuts and Jobs Act (TCJA) of the Trump administration had increased to $11.18 million for single taxpayers and $22.36 million for married taxpayers. The amount of Estate Tax Exemption was set to increase yearly up to 2025 based on inflation rate, to which 2020 already exempts $11.58 million from estate taxes. This denotes that if Congress approves the reduction of Estate Tax Exemption, recipients of estates worth $5.80 million or higher, received as inheritance or bequeathed to a beneficiary for any reason, will have to pay Estate Taxes.
Additional Social Security payroll tax of 6.2% will be deducted from the salaries of individuals earning $400,000 or more.
An Unsolicited Advice for the Wealthy and High Income Earners
Apparently, the major tax changes proposed by the Biden administration will affect the wealthy and high income earners. That being the case, it’s all the more important for those who rely on the financial advice and services of wealth management companies, to keep abreast with the changes that will transpire under the new administration.
According to the financial advisors of pillarwm, one of the setbacks to hiring large firms that handle the wealth of the ultra rich is that the smaller accounts are often relegated to the lower-ranked wealth managers. The latter on the other hand, simply apply a cookie-cutter approach in carrying out accounting and tax services, estate planning, as well as in giving financial and investment advice. Knowing the changes that will transpire will give individuals the ability to assess if the wealth managers handling their tax plans have taken into account the actual changes. Tax plans after all can help minimize the potential losses that could affect their investment and asset portfolios.