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Proposed Tax Changes with Biden Administration
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Listen in as Withum’s Dan Mayo, National Lead, Federal Tax Policy, discusses proposed upcoming tax changes with the new administration. Learn about the potential changes to both businesses and individuals, as well as what practical steps technology companies can take now to prepare.
Welcome to this episode of founded in tech. I'm your host Mark Ackerley today's show is part of our tech tip series, where I sat down with Dan Mayo to talk about the current tax law and possible changes under the new administration. On today's episode, we discuss what the possible tax changes will be for individuals, what the outlook is for corporations and the possibility of the looming tax hikes. And we cover certain planning techniques under the estate and gift tax. Since there will be some changes to come in there as well. Dan is full of knowledge and it was great picking his brain on this episode, on the current state of the election and the impending tax changes to come. I hope you enjoyed this episode. Hello everyone. Welcome to today's show Dan Mayo is joining me today to talk about possible upcoming changes to the tax system. Hey Dan, how you doing today? Great. How you doing Mark? Doing well doing well. Thanks for joining us. Pleasure to be here. So to kick us off, why don't you give us a quick background of yourself , uh , your role here at wisdom and , uh , what you do.
Speaker 2Sure, thanks. So I'm a , I'm a lawyer by training and a , I function with them . I spend my time mostly doing that , uh, federal tax policy and I focus on the M and a side and also national tax policy, like things like this election results, outcome, your own planning. And I spent a lot of time , uh, writing articles on new issues that come out new regulations, et cetera, and regarding new tax items and advising the firm and clients on federal tax issues.
Speaker 1Awesome. So it's definitely been a busy couple of months for you, I'm sure. Very busy. So , so as you alluded to, why don't you kick us off by giving us a quick , uh, state of the election, right. A background of the results that breakdown of what's kind of been going on and where we currently stand.
Speaker 2Great. So , uh , we , as we know, you know, Joe Biden is now the vice president elect Kamala Harris is president president elect CommonWell Harris is the vice president elect. Um, as of it's now January 6th , which means we had the runoff election yesterday in Georgia for the two Senate seats. So the , uh, after the election, the Democrats also retained control of the house, but with a slimmer majority than they had before , uh, the results, at least as I'm seeing as the moment of we're taping this, the Democrats appear to have won both seats in the, in the Senate, which means there will be a 50, 50 tie in the Senate. And , uh , vice president elect , uh , Harris will have the tie-breaking vote. So it appears that Democrats will have control of the house and the Senate in the , uh, in the new Congress, which , um, what , what does that mean? Right. The next question is what does that mean for federal tax policy? I think that means that we're going to see a very progressive agenda come out of the Democrats and perhaps one of the most progressive agendas in history. Um, you know, this is a unique , um, combination of democratic control of the white house, as well as , uh , the house and the Senate. And though I think we're going to see a lot of reversal of the prior administrations , uh, agenda and a lot of more progressive items, you know, climate change taxes , uh , et cetera.
Speaker 1So, so now that they have kind of majority control, right. Um, what, what does that look like from, and we'll , we'll dive into both aspects from an individual and corporate perspective, but starting off from a individual's tax , uh , standpoint, what does that look like from the current tax law and what changes are being proposed? What changes do you think will be passed? Uh, what does that look like from an overall structure standpoint?
Speaker 2Yeah, so they, you know, there is a slim majority, right? It's 50 50 in the Senate. Um , so they will need every, everyone on board, all the Democrats on board to pass the agenda. So it's not right. There is some still going to be an element of bargaining with the bipartisanship and , and arguing with the other side. Um, if you ain't want you, because you need everybody on board to pass legislation. So having said that we do expect there to be tax increases. When you look at the proposals that , uh, you know, Joe Biden had put forward during the campaign season , um, there were , there were many proposals that would increase taxes on the individual side. So first of all, first off, he would raise the maximum , um, individual tax rate from the current 37% back to 39.6%, which is what it was back in 2017 before the tax cuts and jobs act. He would also phase out a lot of deductions, itemized deductions. And so many of the proposals are aimed at people making either more than 400,000 a year or more than a million dollars a year. Uh, you know, what he calls the higher earners . And so a lot of the proposals are aimed at them. Uh, and, and what he has said throughout the campaign is you will not raise taxes on the middle-class . And so w w whether that just means no one over 400, probably not the case, I'm sure taxes will go up for people making less than 400, but a lot of the proposals that we've seen are a little bit vague, which, you know , we would expect or a campaign, because the more vague the proposal though , the harder it is to attack it. Um, so, so what other things are we saying raising the marginal tax rate from 37 to 39.6 , um , a phase out of the qualified business income deduction. And this is that's the deduction that came in in 2017 as part of the tax cuts and jobs act to equalize the tax treatment between court , between partnerships and escorts on the one hand and C corporations on the other , uh, when the corporate tax rate came down, they wanted to somewhat equalize or try and equalize a bit the treatment between escorts and partnerships and C corporations. So once they gave that lower corporate tax rate, they came out with this qualified business income deduction and , uh , 20% of qualified business income , uh, for partnerships and S corporations , uh , Biden would phase that out for people making more than 400,000 a year. So there would be a , you know , immediate tax increase for , um, owners of partnerships and S corporations. Um, you know , on the individual side, he would also phase out itemized deductions, the benefit of itemized deductions for taxpayers making more than $400,000 a year. The next item I'll mention is a , is very significant, but it hits a smaller class it's targeted to a smaller class of taxpayer. And so one of the proposals would be to increase the rate of tax on long-term capital gain from the current maximum rate, which is 20% to 39.6%, which would be his maximum rate on ordinary income. But this would only apply to taxpayers making more than a million dollars a year. Um , but this is by , by far, one of the most people say draconian measures , um , that for many years, we've been a preferential rate for the long-term capital gain. And , uh , to , to, to essentially eliminate that benefit for long-term capital gain and , and put it on par of the ordinary income is a significant change from a longstanding in existing law. Uh, the one final change I'll mention the individual side of the certainly many others, but , uh , the one I'll mention is that he would increase the , um, the rate of social security tax employment taxes, right? So the recall that employment taxes, there's a 6.2% social security component, and a 1.4 or five Medicare component , um, he would do right now as of, for 20, for 2020, which is that's what most people's minds , uh, it was 137,700. You went up to , I think in 142,000 range for 2021. Uh , but that stops it. So that, that 6.2% tax stops at $142,000, approximately in 2021 , uh, what he, what he, what Joe Biden has said is for people to make more than $400,000 a year, he would bring that 6.2% back. So all income over 400 would be subject to an additional 6.2% employment tax. So that's a fairly significant tax increase for the high earners. Uh , it's not clear what he would do on the range between 142,000 and 400,000, whether there's some intermediate tax would be applied to that or the full sick or nothing, or the full 6.2%, it's not clear what he would do on that. Get the , you know , there's the gap period, but the gap amount between 142 and 400, but we don't believe that he would impose the employment tax on those amounts.
Speaker 1So , so it looks like a lot of these proposals , uh, attacks are on the quote unquote 1%, right? That the higher anyone above 400,000 , um, that are the wealthy individuals, what would be the possible changes to the , the middle class ? What would that look like? You said, you said it would be possible tax raises. How significant do you think that would be?
Speaker 2Well, we don't think it would be very significant because again, his, his main , uh, agenda and sort of his , his tagline for when he was running for office was I will not raise taxes on the middle class. Um, you know, George Bush famously said that and then went against that promise , uh , the first Bush that is. And , um , so , uh, it's not clear. We do expect some tax increases. We've had massive stimulus spending. Uh , the latest round was 900 million , um, for , uh , various items. [inaudible] billion, I'm sorry. In late December, they pass a $900 billion stimulus. I think that was a six or seven in terms of stimulus legislation. And Joe Biden said that's a down payment for the next version. So given the massive government spending that's taken place in the past year , uh , it's likely there's going to be tax increases beyond what was advocated during the election season, so that we do expect there to be some increase in taxes on the middle class. Uh , certainly they will be , uh, diminished and , and smaller and comparisons the taxes on those making over 400 in indefinitely, those making over a million dollars a year.
Speaker 1And then now that we are into January of 2021, do you expect these tax laws to be approved for fiscal year end 2020? Or is this for future years? When do you think that will be enacted?
Speaker 2It's interesting. Congress does have the authority to make the tax laws retroactive. They rarely if ever exercise that authority. So what we expect is that if there are tax increases in 2021, it would be retroactive only to January 1st, 2021, and it would not affect the rates going back to 2020. Um , so that any rate increase, if it's passed in 2021 would only be retroactive to the first of the year. If it , if nothing's enacted until 2022, it would be effective most likely the first of 2022.
Speaker 1Okay. So, so then I guess jumping over to the corporate side of things , um, would that retroactive , uh, rule probably apply as well to January 1st, 2021. So it'd be for future years. And then if you could kind of break down the , the corporate tax proposal , um, compared to the current tax law and , and what's the likely outcome there.
Speaker 2Yeah, absolutely. So they , the, yes, the retroactivity, it would, it would, we would expect it to be the same so that the alleged any legislation passed in 2021 will be retroactive to January 1st of this year and that we don't expect it would impact 2020 , um, the, on the, on the corporate side , um, again, we expect more tax increases, right? The , the rate was the maximum corporate tax rate was 35% before the 2017 , uh , tax legislation. Um, it's now 21% is a flat rate of 21% imposed on corporations. Uh, Biden has , uh , proposed raising that rate to 28%. So, you know , approximately 30% increase in the corporate tax rate, although that is , is a large increase on the corporate tax rate. Uh, historically it's not a, it's not a high tax rate. And so , you know , not that it's much comfort to corporations paying the tax, but it's not a historically high rate. And , uh , it's certainly lower than it was back in 20 early 2017. Uh, other things that , uh, Biden has proposed on the corporate side , uh , repealing the light kind exchange rules that will significantly affect the real estate industry. You know, their ability to defer , uh , the fair gain on the sale of real estate, as long as they invest in light kind of property , uh , he would proposed those light kind of chain rules for taxpayers making over $400,000 a year. You also propose tightening the opportunity's own regime. Uh, that's a tremendously , uh, impactful regime that encourages investment in struggling communities. And so one of the things he proposed to do was to tighten the regime and possibly limited to encourage more affordable housing and job creation within the opportunity zones. Um , so we would expect there to be some , some tightening of the opportunity's own regime, mostly because it's expected to impact the wealthy as opposed to the middle class , uh, on the , uh, the , the , you know , the more on the international side, he would raise rates on the , uh, the guilty tax, which is the global intangible low tax income. He would raise double the grade there from 10 and a half to 21% for companies that invest abroad also would create a new minimum tax of 15% on global book income, but that would only affect larger corporations companies with at least about a hundred million dollars in book income. So there are some proposals to tax the largest corporations in new and novel ways that haven't been done before. There's also proposals just to raise the corporate tax rate, as you said, 21 to 28%, there was there wasn't significant focus during the election season, but the VAT VAT tax is always something that hangs out there because it raises just such a large revenue raiser so that the VAT tax is evaluated. Tax is something we see more frequently in Europe. Um, and it's all function similar to a sales tax, but it taxes sort of every level in the , uh, in the supply chain. And so we , we always on the horizon is always a bad tax. And then whether one will come in in the U S just because it's such a large revenue raiser, and usually they start out with lower rates that build it become more larger over time. So that's something that hangs out there, but not something focused on, particularly by the candidate storing the , you know, the election.
Speaker 1Okay. So just to kind of bring in summary, you Trump's, when he was president Trump was running for president , um, his whole goal was to lower tax rates, bring jobs back to America, and now it looks like we're kind of shifting the other way, where with president Biden, we're going to increase tax rates. Is that going to force jobs out of America? What's the, what's the kind of driver behind this and what, why would he increase tax the corporate tax rate from 21 to 28?
Speaker 2Yeah, so the, the there've been a revenue raise, right? The, the, the main reason to raise rates is that it's a, the government needs the money. Um, it's not like he's trying to penalize corporations or anything, and , you know, this is still America and , or a capitalist country. Um, but I think what those proposals that you hear from Donald Trump, I think many of them are similar , uh, just with a different , uh, bent from, you know, Joe Biden. And so what he said is a lot of times he's proposing to like a maiden America tax credit , uh, something which would , um, you know, give a tax credit to offset , um, you know, some foreign taxes if it's made in America and in opera products sent abroad. Also he creates an offshoring tax penalty, right? So he wants to prevent the , the movement of jobs off shore. So he would create a penalty, a cert tax on profits of 10% for companies that send jobs abroad. So there are, you know, the Biden is not just about raising taxes, at least what he stated in the , on the campaign trail is that , uh , there are, there are proposals in effect to bring jobs back to America and , uh, encourage , uh, exporting, encourage , uh , bringing jobs back to America in manufacturing here in the United States. So there are , there are a raft of tax credits that he's proposed for the manufacturing sector to , uh , help , uh , shore that up and increase the manufacturing within the United States.
Speaker 1Okay. And , and as you, you mentioned earlier, so we're on our second round of stimulus and , uh, this is possibly the beginning of more , um, with, with Biden's current tax structure or , or plans that he outlined outlined during his campaign. Do you think that it could increase beyond that if there's further stimulus packages that are delivered , um, to kind of offset that, do you think that's a possibility at all?
Speaker 2Yeah, I think there they're likely going to be a significant stimulus , uh , legislation , uh, in the, in the new year. And as I said, Biden mentioned that the, the, the December stimulus of 900 billion was a down payment. He viewed that as a down payment on what's to come. So I think we're going to see massive government spending continue in the short run. The fed has indicated they're not even thinking about raising rates. So we're likely to have a low interest rate environment for years to come. We're likely to see a significant government spending increase, which would also involve a tax increases, right. They got to have to fund the spending somewhere. And so the , the tax increases, I , I think we're, we're probably going to come under in either administration, although, you know, one, one is more vocal about saying we were advocating for it. Uh, but, but eventually with given the amount of government spending, you know , either you reduce spending, erase taxes , uh , there's no magic to , uh , to funding the government.
Speaker 1That's what I figured. That's what I assumed. If there was more students packages that come, that they would just have to raise taxes further beyond what they're saying it is now that's, you know, it's, it's a give and take.
Speaker 2Right, right. You know, we're, we're , uh, as , uh , working at an accounting firm, we , we know there's very , there's a , there's certain truisms about finance. And one of them is when you're funding a government, you either have to raise money or by raise revenue or cut expenses. There's a, there's a , um, there's no magic to this. And , uh, there is complication about where you do that and , and where you raise the funds and who , who shoulders the burden, and also where you make cuts and who shoulders the burden of any funding cuts. But fundamentally those are the two options.
Speaker 1Gotcha. Okay. Awesome. So quickly transitioning over to , um, uh , state and gift tax. What , what would be the changes there? I know that's kind of been a hot topic , um, for , for a lot of people that I guess maybe you're on the wealthier side where they're kind of transitioning money or , or move it between their, their, their sons or daughters. So, so what would that look like , um, on , on Biden's current proposal compared to the current tax plan, what's the likely outcome there? Is it, is it just higher tax rates or , or what, what would be the kind of nuances there?
Speaker 2Yeah. So there was a lot of talk about this , uh , over, particularly over a year end , a lot of planning on the thought of, you know, that if there's a eliminate, if there's changes in the rules in 2021, it would not involve a clawback to 2020. So we saw significant year-end tax planning by wealthier individuals who wanted to use up their lifetime exemption. So the way it works now, there's a about 11 and a half million dollar lifetime exemption for every individual, a doubles or for married couples. You ever , you know , just over 23 million for a married couple. And that, that lifetime exemption gift and estate tax exemption is , um , scheduled to drop the $5 million in 2026, right. That was a temporary , um, a temporary amount. So we've scheduled to drop anyway. Uh, Biden has proposed reducing that sooner. So it's not clear though, whether he would reduce it to pre 2018 levels , um, or to 2009 levels. I believe either 5 million or three and a half million would be the exemption under , uh , you know , uh , is able to pass that so that the , the major proposal is reducing the , um, the lifetime exemption, which is why we saw a significant activity a year end . The other major thing is he would do is eliminate the step up in basis upon death. So right now, if , if an individual passes away with appreciated securities, the , uh , the , the securities, the beneficiaries receive a step up in basis, which eliminates any tax on that , that built-in gain. And so one of the things that Biden proposed is , uh, eliminating that step up in basis on death. And what's not clear is when he would impose the tax, would it, would it be through basis adjustments to the beneficiary, or would it be through , um, you know, requiring the tax be paid at the moment, you know , with the final state tax return. So it's not clear when the tax would be due, but he has proposed eliminating that again, that's a fundamental change in a state tax and , uh , it certainly would have a significant impact on the , um, uh, the, you know, the wealthier individuals.
Speaker 1So you mentioned Biden is proposing dropping that lifetime exemption sooner. Would that be in the current year, you think, or would that be in future years where also at the end of 2021, we could see a lot of estate planning as well.
Speaker 2Yeah. If it's past , um, if that, you know, the proposal is enacted , it would likely be this year and they would probably bring it back either a five or three and a half million , um, effective January one, 2021. But again, you know , there , the legislative process produces a lot of strange results and , uh , what comes out of the legislative process is not necessarily what the politicians put into it. And so, right. There's heavy negotiation on these provisions and even within the democratic party. So it's not as it , right. So it's not as if , um , the candidate has the ability to enact his proposals, cart, lunch . He doesn't have carte blanche to enact his proposals on a wholesale basis. There is a significant negotiation in Congress. And so that even if he proposes reducing it to five or three and a half, that's not necessarily what would happen. So you can predict it, you , you know, the best you can predict directionality of taxes and particular tax items, but exact amounts are hard to pin down.
Speaker 1Gotcha . Awesome. Yeah. So, so I guess really quickly in summary, I mean, we covered a bunch of great topics here. What , what advice would you give or would you recommend to individuals or companies when planning for, and anticipating these possible upcoming changes between things being likely to be adopted , uh , for, for 2021 or possibly in future years, can companies be proactive in planning for these, these tax impact changes or, or what would that look like and what advice would you recommend?
Speaker 2Yes . So I think the advice we typically give clients is to consider your future plans. And , um, don't let, don't let the tax tail wag the planning dog, as we say, in , in the tax world , um, you know, taxes are an important part of, of your business , uh, but they shouldn't be driving the business decisions. And so when you, if you have a business plans, taxes may accelerate them , uh , may cause you to shift direction slightly, but , um, fundamental , you know , you operate your business the way you would operate it, and we can model out the taxes for you. We can help model them out, which may cause you to accelerate some decisions into far others. Um, but we don't, we don't recommend drastic action based upon a candidates proposals again, which may or may not be enacted until , uh , uh, and, and even if an active , they may, you know, they may come up in different form and they were proposed. So the, the best advice we give clients is, you know, stick with your business plans and , uh , we can help you model the effects of what the tax rates would do , uh , either on the individual side or the corporate side, but that , um, you know, the , the tax laws should cause you changes to the tax laws , uh , while significant , um , are probably not going to drive the business decision so that, you know, the exit exigencies of business should, should control. And the taxes will be a component that you factor in, as I say, causing to accelerate or defer certain activities.
Speaker 1Yeah. And it's , it's never too early to consult your tax advisor , um, especially as we're rolling into tax season here. So it especially be proactive with that thinking , um, and make sure you're you're well ahead of the game,
Speaker 2That's where you , yeah . Planning takes time and you write to, to make , uh , some decisions. It definitely takes a , it can take weeks or months, or even longer in some cases. And in many people ran bumped into that against , uh , bumped up against that a year end when they were , um, you know, unable to get plans done because we started too late in the process. So, you know, we , we understand that estate planning lawyers were turning away work because they just had too much going on. So , um, these things do take time. A lot of times you need valuations, particularly with estate planning. Um, so those kinds of things take time. And so we do recommend, you know, speaking to your advisor sooner rather than later , uh , to develop a plan , uh , and put in place. So you have contingency plans. If rates are, if these tax increases are enacted , how will it impact you and what , you know , how can you pivot in response to the changes in tax law?
Speaker 1Awesome. I think you hit the nail on the head there. Well, that wraps up today's episode on the current tax climate and the possible changes to come. Thank you, Dan, for joining me today, if you'd like to learn more, please visit with them.com where you can find Dan has authored numerous articles and other content. So please visit the website if you want. Hear more. Thank you. Thanks . Thank you for tuning in. If you liked it, want to hear more, you can follow us and subscribe and we'll see you next time on founded in tech.