President Biden’s coronavirus pandemic relief package — known as the American Rescue Plan—recently passed both the House and the Senate. However, I predict that no substantive tax laws will be changed until the budget reconciliation is allowed to be used again in October, so the administration can quickly advance high-priority fiscal legislation focused on COVID without facing the filibuster.
Here are the major tax law changes that the Biden administration is proposing:
But for those earning over $1 million, Biden wants to increase the long-term capital gains tax rate to 39.6 percent. This would make it no longer desirable to hold investments for longer than a year, since the richest would pay 39.6 percent for short-term gains as well.
1. Wealth tax. Congress is promoting a wealth tax that would hit about 180,000 households; Sen. Bernie Sanders says the new levy would increase federal revenue by about 10 percent, raising $4.35 trillion over a decade. Individuals with a net worth of $16 million and up ($32 million and up for married couples) would face an annual tax, starting at 1 percent and topping out at 8 percent for married couples worth $10 billion-plus. Sen. Elizabeth Warren has a similar, slightly less ambitious, wealth tax plan.
2. A higher marginal tax rate for the wealthy. Because President Biden wants the country's wealthiest to pay higher taxes, he aims to raise the top marginal
3. More Social Security taxes for higher earners. Right now, for those who earn more than $142,800, the excess isn’t subject to a 12.4 percent Social Security tax. But Biden wants to tax wages over $400,000. Under the new law, if a taxpayer made over $400,000, they wouldn't pay Social Security taxes on earnings between $142,800 and $400,000, but they would on earnings over $400,000.
4. A higher corporate tax rate. Although the Tax Cuts and Jobs Act lowered the top corporate tax rate from 35 percent to 21 percent, the Biden administration wants to raise that top rate to 28 percent. While this change wouldn't affect individual taxpayers directly, it would probably trickle down to consumers indirectly via higher-cost goods and services.
5. No more tax breaks on long-term capital gains for the wealthy. If a taxpayer holds stocks for at least a year and a day before selling them at a profit, they’re taxed at a more favorable rate than for stocks held for a year or less. For America’s highest earners, their long-term
6. Eliminate the 1031 exchanges. The Biden administration is interested in eliminating the 1031 Exchange Program for real estate investors with incomes above $400,000. The program allows investors to defer capital gains taxes due upon the sale of an investment property by reinvesting the proceeds into another property. But if this program is eliminated, high-income investors might hold on to properties for longer than in the past, which may decrease supply and demand.
7. Tax unrealized gains. The Biden administration is proposing a so-called “mark-to-market” regime for taxing unrealized capital gains. Currently, individuals pay tax only on “realized” capital gains — when the asset is sold, and they collect a profit. But under the new law, if they’re over a certain income level or with qualifying assets exceeding a threshold, they would be expected to pay taxes on increases in the on-paper value of assets, even if the capital gain was unrealized.
The possible long-term effects
As I look over these proposed changes to our tax law, my only concern is what the long-term effects could be. Will it help get our growing deficit down? And could raising corporate taxes after coming out of a pandemic backfire and act as a disincentive for investment?
Could this trigger companies into moving out of the U.S. to flee taxes? We’re already seeing big hedge funds leaving New York because of high taxes, and Hewlett-Packard and Tesla fled the high taxes of California for the more business-friendly environment of Texas.
And looking at accountants and tax professionals, I’d say that they have just been through enough, having to learn a whole new tax code during a very trying pandemic year. With so many significant tax changes, it’s taken them time to adjust to these changes — and now we have more changes to come?
Also, as a side note, when you have significant tax changes, every industry in the United States will be lobbying in D.C. for favorable tax changes to the bill. Congress will be bombarded by every industry you can think of. Everyone will be hedging their case.
What does this mean for you?
At this point, what does this mean for the tax and accounting community? Here’s the good news: You won’t have to learn a whole new tax code for 2020/2021. Major tax law changes will have to wait until October, and my guess is that the administration will try to get them passed by year-end, with them going into law in 2022.
In the meantime, if you or your clients feel you wouldn’t benefit from the proposed tax law changes I’ve outlined above, now is the time to speak up. We have between now and October to let our voices be heard.
