Smart Tax Planning

Here’s what’s ahead for President-elect Biden’s tax plan

Key Points
  • President-elect Joe Biden has proposed a series of changes, including boosting taxes on households with more than $400,000 in income, as well as raising corporate taxes.
  • Whether those plans ultimately happen will come down to which party has control over the Senate.
  • A tougher IRS under a Biden administration is also a possibility. Lawmakers on both sides of the aisle might be amenable to more funds for the agency, since the IRS was instrumental in distributing aid during the crisis.
President-elect Joe Biden and Vice President-elect Kamala Harris at the transition team's Covid-19 advisory board Nov. 9, 2020 meeting in Wilmington, Delaware.
Joe Raedle | Getty Images

Joe Biden may have won the presidency, but there's no guarantee his tax plan will come to fruition intact.

President-elect Biden campaigned on a series of sweeping changes to the tax code, aiming to levy higher taxes on high-income households and corporations.

His proposal would also overhaul the way wealthy families transfer assets to heirs.

The catch is that the success of his plan depended on a "blue wave" in Washington.

While Democrats have preserved their control of the House, two runoff elections in Georgia will determine whether there's a 50-50 split in the Senate.

Those runoff races, which will take place in January, are between GOP Sen. Kelly Loeffler and Democratic candidate Raphael Warnock, and Sen. David Perdue, R-Ga., and Democrat Jon Ossoff.

"A lot will ride on the outcome of the Georgia runoffs in early January," said Garrett Watson, senior policy analyst at the Tax Foundation.

"Theoretically, a tax hike is likelier with a 50-50 Senate with Vice President-elect Kamala Harris as the tie breaker," he said.

Scouring for revenue

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If those races don't swing toward Democrats, the more aggressive components of the tax plan likely won't move forward any time soon.

Those include raising the top individual income tax rate to 39.6% from its current level of 37% and extending the 12.4% portion of the Social Security tax — which is shared by employers and employees — to earnings over $400,000. Currently, wages up to $137,700 are subject to the tax.

Biden has also called for the capital gains rate to rise to 39.6% for taxpayers with income over $1 million. Currently, wealthy investors face long-term capital gains rates of up to 20%.

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The president-elect has also proposed overhauling taxes around wealth transfers.

He would eliminate the step-up in basis, which allows heirs to receive assets valued as of the date of death. Instead, any unrealized capital gains would be subject to tax.

Biden would also reduce the amount that an individual can transfer free of estate and gift taxes from $11.58 million to $3.5 million in bequeaths at death and $1 million in lifetime gifts.

"I would say that if Democrats don't regain control of the Senate, it will be difficult for the Biden-Harris administration to enact many of the proposals in their campaign tax plan," said Joshua Blank, law professor and faculty director of strategic initiatives at the University of California, Irvine.

Meeting in the middle

Senate Foreign Relations Committee member Sen. Marco Rubio, R-Fla., questions witnesses during a hearing about Venezuela on Aug. 4, 2020.
Chip Somodevilla | Getty Images

Nevertheless, there are some portions of Biden's proposal that could garner support from GOP lawmakers.

For instance, the president-elect has called for a temporary expansion of the child tax credit, raising it to $3,000 for children aged 17 and under, plus a $600 bonus for kids under 6.

"Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, have supported an expansion of the child tax credit in the past, so there's some Republican support there," said Mark Mazur, director of the Tax Policy Center.

There might even be some wiggle room on raising the corporate tax rate — which Biden wishes to raise from 21% to 28% —  if lawmakers are willing to work together to bolster battered federal coffers, some said.

"I don't know if Republicans are as locked into the 21% rate as much as people think they are — you have a need to raise revenue," said Tony Nitti, CPA and a partner in RubinBrown's Tax Services Group in Denver. "There's a chance the corporate rate could be in play."

Boosting the IRS

The Internal Revenue Service's offices in Washington, D.C.
Adam Jeffery | CNBC

Another idea that might stand a chance in a split Congress could be to properly fund the IRS so it can pursue larger targets, rather than going through the contentious process of drafting and passing new tax legislation.

"Even in a divided Congress, it might be politically easier to do that, compared to a more dramatic income tax increase," said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy.

"We're not even talking about tax increases," he said. "We're talking about enforcing the laws that are already on the books."

This could include cracking down on business owners' inappropriate use of S-corporations to circumvent payroll taxes, Wamhoff said.

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The IRS appropriation and number of employees fell by more than 20% between fiscal years 2010 and 2019, according to the Taxpayer Advocate Service, an agency watchdog.

As the agency's workload becomes heavier — consider that the IRS distributed millions of stimulus payments via mail and electronically during the crisis — it continues to suffer from a lack of resources.

"It was a tremendous amount of work for the IRS to send the checks to everyone who is entitled and all of this outreach to non-filers who are eligible for payment," said Leandra Lederman, director of the tax program at the Indiana University Maurer School of Law.

"There seems to be a bipartisan understanding that the IRS really needs more funding and more resources to be able to enforce the laws on the books and provide service to taxpayers who need help," she said.