President Joe Biden’s tax plan departs significantly from the policies and major tax reductions enacted during the Trump presidency.
For example, the Tax Cuts and Jobs Act (TCJA) of 2017 Trump signed off in 2017 made several changes to the tax code, including reducing taxes for America’s highest earners and corporations. The high-income taxes is one of the first areas Joe Biden will target in his new tax policy.
What else can we expect from Biden’s tax policy?
Continue reading to find out where President Joe Biden will raise taxes and how his tax policy will affect your American clients. We also share some valuable tips to help your clients with the tax planning for 2021 and beyond.
EU countries account for nearly 46% of UK exports, meaning the UK stood to lose $32 billion without a trade deal. So British companies were relieved at retaining the UK-EU Free Trade Agreement (FTA) on 24 December 2020.
While the FTA avoided the immediate disruption from a no-deal Brexit, the UK is already experiencing changes to its trade:
- Several EU retailers, including bicycle part firm Dutch Bike Bits, no longer deliver to the UK due to the increased bureaucracy and additional costs of adhering to UK tax laws.
- Smaller UK firms have suspended trade with the EU until they can see how the new changes will impact their operations.
- The UK Road Haulage Association already reported that some trucks are already turned away at channel crossings because of Brexit paperwork.
- New paperwork introduced for all British fishermen, including European Health Certificate proving fish meet regulatory standards, created ‘red tape’ which left Cornish fishermen’s’ catches to rot in UK harbours.
Many economists worry that Brexit will create more paperwork and barriers to trade, which will hurt the UK’s economic growth in the long run.
The Biden Administration's initial tax policy mainly focuses on passing tax proposals that will help revive the US economy, including benefits targeted for low and middle income families. Here are the main changes the new president intends to make:
- Biden proposed to return the Estate and Gift Taxes back to 2009 levels, capping estate tax exemption at $3.5 million and lifetime gift tax exemption of $1 million per individual taxpayer.
- In terms of income taxes, Biden wants to maintain the current seven brackets and only increase the top bracket to 39.6%. This increase largely affects taxpayers earning more than $400,000 per year.
- Additionally, Biden seeks to increase the corporate tax rate to 28% and add a 15% corporate minimum tax on book income in excess of $100 million.
- For investors with incomes exceeding $400,000, Biden proposed eliminating the tax preference for 1031 ‘like kind’ exchanges, preventing real estate investors from selling properties outside the 1031 exchange.
- Biden’s new tax plan also includes eliminating the Capital Gains Step-up at Death. Currently, when a person dies, assets in their estate typically receive a basis step-up to fair market value when inherited by a beneficiary. This means the beneficiary can sell the asset with little or no capital gains tax. In Biden’s plan, the beneficiary would either assume the deceased’s cost basis in the asset or the unrealised appreciation could be taxable at the person’s death.
- Biden may also want to change the Global Intangible Low-Taxed Income (GILTI), nixing the tangible asset aspect and increase the tax rate to 21%. He also would restructure GILTI to apply on a jurisdictional basis. As a result, US taxpayers with companies abroad face dramatic tax increases.
On the other side, Biden’s tax plan also includes a number of benefits for the US’s lower-income earners:
- He’ll increase the Child and Dependent Tax Credit to $8,000 (from $3,000) or $16,000 for more than one dependent.
- Biden’s tax policy will also offer tax relief for student debt forgiveness and restore the first-time homebuyers credit.
- The estate tax exemption would drop by about 50%.
High-income taxpayers and US citizens with companies offshore will be the ones taking the main hit for Biden’s corporate tax increases. Additionally, reverting the Estate and Gift Tax cap will diminish wealthy individuals’s ability to maximise lifetime planning techniques by giving away more assets during their lifetime.
When it comes to individual taxes, clients with incomes slightly above the new $400,000 income threshold may have the most to lose with potential Income Tax bracket changes. They may choose to accelerate income to balance out the increased tax rate, although the potential benefit is limited in this case.
Biden’s tax proposal to eliminate the step-up in basis of capital assets upon death would rapidly switch this very desirable tax strategy to an especially undesirable one. Taxing all appreciated investments at death, all at once, will most likely push capital gains into the new higher capital gains rate.
While the USA's highest earners and those with businesses abroad may suffer from Biden’s tax changes, the other side of the coin shows a lot of benefits. His finance program is designed to improve health care, education and infrastructure, and fight climate change. Many of these programs would have direct impacts on many American households in a very positive way.
Now that the election and inauguration has passed, clients will look to their accountants and other financial advisors to help them weather potential financial storms Biden’s tax plan could bring.
In many cases, the ‘right’ answer is not known today, but it’s still critical to maintain ongoing conversations with your clients to keep them informed of any changes. For some high-net-worth clients, failing to plan now could result in a major tax bill later. We’ve listed some tips to help American clients utilise tax planning opportunities
At this point, there are many unknowns since any new tax policy must go through extensive modifications to be approved and passed into law. Keep on top of new information about how Joe Biden’s tax changes unfold to give you and your clients the best chance to avoid missing opportunities and paying more than is necessary.
Top Tips for a Successful Tax Season in 2021
- Prepare for various possibilities –– It’s still unclear when Biden’s changes will take affect and exactly how they will impact you. Therefore, it’s wise to prepare for different scenarios.
- Create an “If-Then” chart –– To help clients prepare for various possible outcomes, your clients can create a chart for how they will tackle each possible scenario. “If this happens, then I’ll do this.”
Utilise your bonus exemption while you can –– Bonus exemptions, referring to the difference between the current exemption rate minus the expected future amount, are ‘use it or lose it’ amounts, so your clients may be wise to use their bonus exemptions while they can.
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