By Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services

and

James J. DeLuca, CPA, MST
Senior Tax Manager

With less than one week until the 2020 presidential election, the Democratic Party’s nominee, former Vice President Joseph R. Biden Jr., is polling narrowly ahead of incumbent Republican President Donald Trump in key battleground states. Biden also leads in the national polls.

From a tax perspective, the question is how a win for the Joe Biden-Kamala Harris ticket would affect your personal and business taxes. To help answer that question we have put together an outline of the Biden tax proposal and some planning ideas.

The Biden tax proposal is primarily tax progressive, meaning it calls for higher tax rates for higher-earning taxpayers. But higher-earning taxpayers should take heart and remember what Judge Learned Hand stated in 1934: “Anyone may so arrange his affairs that his (her) taxes shall be as low as possible; he (she) is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

In other words, it’s time to undertake some tax planning that is geared to your specific situation to ensure that you don’t pay any more in taxes than what is required, either under current law or any future tax laws.

While the results of the election may not be known for a matter of weeks, given the unusual circumstances around mail-in voting this year, timing is critical when it comes to tax planning. In the event of a change in administration, certain taxpayers should be looking ahead to consider the impact that a change in federal tax law will have on them personally and on their businesses.

Following are some key provisions of Democrat Joe Biden’s tax proposal with our analysis and recommendations that may benefit some taxpayers. As always, it’s important to remember that your circumstances are unique, and you should speak with your G.T. Reilly tax advisor before making any changes.

Social Security Changes

Under the Biden tax proposal, once earnings reach the Social Security wage base of $137,700, there would be a lapse to the earning being subject to Social Security taxes between the range of $137,700 to $400,000. Once the $400,000 limit is obtained the earning once again (without limit) will be subject to Social Security tax of 12.4%, split evenly between the employee and the employer.

To lessen the burden of paying more in Social Security taxes, small business owners that operate as partnerships or sole proprietors should consider converting their business entities to a Subchapter S corporation. Neither the pass-through earnings nor distributions from such organization are subject to Social Security taxes.

Individual Changes

For taxpayers with income above $400,000:

• The top individual income tax bracket will be increased to 39.6 % from 37% for high-income earners. The income bracket at which a single taxpayer will hit the top rate will drop to $400,000 from $500,000; and for joint filers the top bracket will drop to $400,000 from $600,000.
• The Qualified Business Income deduction will be phased out. The QBI deduction would not be available to taxpayers with more than $400,000 of income as it would totally phase out at that income level.
• Tax-deferred Section 1031 exchanges will be eliminated for taxpayers with more than $400,000.
• The Pease Limitation will be reinstated. With the Pease limitation certain itemized deductions (state and local taxes, mortgage interest, and charitable contributions) were limited by 3% of the amount that a taxpayer’s income exceeded a benchmark set by Congress. The entire reduction could not exceed 20% of the taxpayer’s itemized deduction.
• The tax benefit from itemized deductions would be capped at 28%. Under such a situation a taxpayer in a tax bracket higher than 28% would only obtain a tax benefit from their itemized deductions at a rate of 28%.

Taxpayers with more than $400,000 of income that would be affected by the above proposals should consider lowering their income by:

• Changing the method of accounting for business entities that are reported on their tax returns from the accrual method to the cash method of accounting.
• Taking advantage of accelerated depreciation like 100% bonus depreciation and enhanced Section 179 deduction.
• For 2020 income should be accelerated and deductions deferred to 2021. For 2021 and beyond, where taxpayers may be in a higher tax rate environment and the strategy is to come under the $400,000 threshold, income should be deferred, and deductions accelerated.

For taxpayers with income above $1 million:

For taxpayers with income from long-term capital gains and qualified dividends, this income will be taxed at an ordinary income tax rate of 39.6% to the extent that the taxpayer’s long-term capital gains and qualified dividends when added to the taxpayer’s other income exceeds $1 million.

Taxpayers who normally have income over $1 million and substantial investment income, or are planning on selling a substantial appreciated asset, should consider sheltering their investment income by:

• Harvesting capital losses, if any, to reduce capital gain income.
• Taking advantage of installment gain reporting for sales of property where the proceeds are receivable over several years.
• Invest in growth stocks that normally do not pay dividends.
• Invest in Section 1202 stock where the gains are not subject to federal regular, AMT or state taxation.
• Utilizing ROTH accounts for investing in stocks expected to substantially appreciate.

Estate & Gift Tax Changes:

The Biden tax proposal would lower the estate and gift tax exclusion to $5.79 million from $11.58 million and eliminate the step-up in basis on all assets (except for assets that are income in respect of decedent) upon the death of a taxpayer.

Taxpayers who would be affected by a change in the lower estate and gift tax exclusion should consider:

• Gift planning for 2020 to take advantage of the higher exclusion amount.
• Ensuring that portability is not lost, whereby a deceased spouse’s unused estate and gift tax exclusion is carried over to the remaining spouse.
• Converting traditional individual retirement accounts to ROTH accounts, thereby removing the federal and state income taxes from a decedent’s estate.
• Utilizing gifting through family partnerships and taking discounts for lack of marketability and minority discounts.

Corporate and Foreign Tax Changes:

The Biden tax proposal would increase the corporate income tax rate to 28% from 21%. For companies with a book profit of $100 million or more there will be a new alternative minimum tax of 15% of book income. Additionally, for U.S. companies with foreign subsidiaries that are subject to the GILTI tax (Global Intangible Low Tax Income) the tax rate will increase to 21% from 10.5%.

Strategies for corporate taxpayers for 2020 and later years would include:

• Accelerating income into 2020 and deferring deductions to 2021 and later years.
• Consider converting to the cash method of accounting.
• Taking advantage of accelerated depreciation.
• Converting to the LIFO method of accounting for inventories.
• Ensure accounting policies are in place to write off small asset purchases.

If you would like to have a discussion about how potential changes in tax law would affect you, your family and your business, please contact Charlie Kennedy or Jim DeLuca at 617-696-8900.