Potential tax reform under the Biden administration

The Biden administration’s potential tax policies combined with Democratic control of both the House of Representatives and Senate could result in future, substantive tax legislation and related policy changes. However, only time will tell how the evenly divided Senate—with Vice President Kamala Harris casting tiebreaking votes—will impact the Biden administration’s tax agenda.

While it remains to be seen how the Biden administration will prioritize tax policies, Goldman Sachs Ayco Personal Financial Management’s (“Ayco’s”) Tax Policy & Research specialists explored potential changes that may be coming, based on the tax plans proposed during the 2020 Presidential campaign. It’s important to remember that campaign proposals often do not result in legislation.

Proposed income tax changes

• An increase of the top marginal income tax rate from the current 37% to 39.6%
• An increase of the long‐term capital gains tax rate and qualified dividend tax rate to 39.6% for taxpayers with income in excess of $1,000,000—from the current 20%
• A 28% cap on the benefit of itemized deductions and a return of the Pease limitation for those earning more than $400,000. The Pease limitation required some taxpayers to reduce their otherwise allowable itemized deductions by up to 3% of their adjusted gross income. Both the cap on allowable deductions and the reintroduction of a Pease limitation would reduce the tax benefit of itemized deductions
• Social Security tax on income above $400,000. The tax would be in addition to Social Security tax currently collected on the first $142,800 of income. There would be no Social Security tax on income between $142,800 and $400,000. The 12.4% Social Security tax is split between employers and employees. Under current Senate rules, changes to Social Security tax require 60 votes and cannot occur under budget reconciliation

Proposed business tax changes

• An increase of the top marginal corporate income tax rate from 21% to 28%
• Phase out of the qualified business income deduction for those with taxable incomes above $400,000
• Repeal of like‐kind exchanges of real property for taxpayers with income over $400,000

Potential gift, goods and services tax (GST) and estate tax changes

• Returning the estate tax to 2009 levels (estate and GST tax exemptions of $3.5 million per individual and lifetime gift tax exemption of $1 million per individual). An increase of the top estate tax rate to the 2009 level of 45% is also possible. The increased estate, gift and GST tax exemptions under the Tax Cuts and Jobs Act (TCJA)—currently $11.7M per individual for 2021—are scheduled to sunset December 31, 2025, and that date could be changed under new legislation. While unlikely, it is possible the reduced exemptions could be made retroactive to January 1, 2021. It is also possible that legislation could repeal the current IRS regulations preserving the benefit of the increased exemptions for taxpayers who have already used them through lifetime transfers
• Eliminate step‐up in basis and possibly tax unrealized capital gains at death on assets not passing to a surviving spouse or charity
• While President Biden was Vice President, the Obama Administration proposed:
  
  
  • A minimum term of 10 years and a minimum remainder value equal to the greater of 25% of the value of assets contributed to the trust or $500,000 for all grantor retained annuity trusts (GRATs). The existing minimum term is two years and there is no minimum remainder value
  • The elimination of GST tax benefits for trusts that have existed for over 90 years
  • An elimination of certain valuation discounts where an interest in a family‐controlled entity is transferred to a member of the family or a trust for their benefit