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Tax Planning for a Possible Joe Biden Presidency

David S. De Jong, LLM, CPA

With Election Day just over two months away and the end of 2020 following two months later, it’s not too soon to consider the landscape of the tax law in the event of a Joe Biden Presidency.  Back to 1969, a major tax bill has been enacted in the first year following a shift in political control.  Change will be facilitated, of course, if the Democrats take control of the Senate, requiring a net gain of three seats, while holding their existing majority in the House.

            What would 2021 tax law revisions look like under a Biden administration?  As a starting point, look to the Democratic party platform and the prior specific proposals of candidate Biden.

            1.         Individual tax rates – Expect the highest individual marginal bracket to return to the 39.6 percent rate of the Obama administration beginning as low as $400,000 of taxable income.

            2.         Dividend and capital gain rates – Both dividends and capital gains may be taxed at ordinary income rates for the highest earners – perhaps those with taxable income in excess of $ 1 million.

            3.         Like-Kind exchanges – Joe Biden has suggested the elimination of real estate swaps for those with incomes over $400,000.  Exchanges of personal property have been disallowed since 2018.

            4.         Basis of inherited assets – Candidate Biden has suggested the elimination of the stepped-up basis of most assets on death.  This may apply only to heirs of larger estates.  As was the case with a 1976 law terminating carryover basis which was repealed retroactively a year later, appreciation prior to enactment may still enjoy the step-up.

            5.         Student loans – Joe Biden supports any forgiveness of student loans to be excludable from income.

            6.         Qualified business income deduction – The QBID, scheduled to expire after 2025, may be phased out for all higher income individuals and not just those with income from specified service businesses.

            7.         Itemized deductions – The $10,000 cap on deducting state and local taxes, also scheduled to expire after 2025, may be repealed but the benefit of this restoration could be offset by a proposal to limit the tax benefit of all itemized deductions to 28 percent.  In other words, an individual in a higher tax bracket with $50,000 of itemized deductions could save no more than $14,000 in taxes by the itemized deductions.

            8.         Tax credits – Candidate Biden would significantly raise the child tax credit to $8,000 for one child and $16,000 for two or more, phasing out at adjusted gross income between $125,000 and $400,000.  He favors expanding the earned income credit for lower income individuals without dependents to include those over age 65.  He supports an advanced and refundable tax credit of up to $15,000 for first-time homebuyers as well as a renters’ tax credit of up to 30 percent of income for low-income individuals.

            9.         Estate taxes – Expect the current estate and gift tax exemption of $11,580,000, already scheduled to be cut in half in 2026, to be reduced to an amount as low as $3.5 million or, perhaps more likely, to about $5.8 million (one-half of the current amount as indexed in 2021).

            The next question is whether planning steps can await the results of the election and a 2021 tax bill?  Examining “tax history”, some new provisions may be effective on enactment or even a date thereafter but others may be retroactive to the start of the year or even to an earlier date to prevent tax saving maneuvers.  Courts have generally found retroactive tax legislation to be constitutional.

            Following are steps to be considered by affected individuals.  Most may be accomplished after November 3 in the event of a Democratic sweep but wealthiest individuals wishing to take advantage of the current enhanced applicable estate and gift tax exemption should complete gifting prior to Election Day as a hedge on retroactivity.

            The Internal Revenue Service has previously indicated that the scheduled halving of the applicable exemption in 2026 will not cause a “clawback” meaning that the entire reduced exemption will remain available to individuals who fully utilized the expired enhanced amount.  Accordingly, wealthiest individuals who are comfortable passing considerable assets to next generations may wish to consider, subject to prior gifting, transfers of up to $5,790,000 prior to Election Day.  Married couples may consider transfers of twice this amount. 

            Actions for higher income individuals to consider prior to year-end in the event of a Democratic sweep include:

                        ●          Accelerating income and capital gain into 2020.

●          Closing by year-end on the disposition of real property to be exchanged (given the likely ability to close on replacement property into 2021).

●          Accelerating large planned charitable lifetime giving into 2020.

Actions that should be considered by additional individuals as well include:

●          Delaying payment of property taxes, 2020 estimated state income taxes and delinquent state income taxes until 2021.

●          If a first-time homebuyer, holding up the purchase of a property until after enactment.

●          If eligible for discharge of student debt and discharge would be taxable under current law, delaying forgiveness until after enactment.