January 20, 2021 brings with it a new Presidential Administration in the United States, but it also brings potential new changes to the tax code. Democrats now have control of the White House and both chambers of Congress making it likely that the new Biden Administration will pass some form of tax reform in its first two years. Here is what you need to know about the proposed tax reform the Biden Administration has and how it can impact your Florida business.
Will there be a Biden Tax Hike?
There are major points of the Biden Administration’s proposed plan that may have an impact on Florida businesses and individuals alike. First, the plan proposes a clear $400,000 income minimum to start seeing an increase in the federal income tax rate. The rate can return to as high as 39.6%, whether this is for single filers, joint filers, or both is still unclear and the proposed rate hikes are not set-in stone until negotiations begin in Congress. Aside from the federal income tax increase the proposed changes include eliminating the Qualified Business Income Deduction (QBI) for those making more than $400,000. This same income mark restricts the use of a 1031 exchange, reducing the ability for individuals above the $400,000 mark to defer recognition of capital gains from properties.
What are the changes to tax deductions and credits?
The proposed Biden tax plan will cap deductions for high earners at 28% rather than the actual rate bracket that the taxpayer is within. However, the child tax credits, and dependent care credits would be expanded which may be beneficial to many in Florida as the state is known for having large families. In addition, to this expansion the proposed plan would see a shift from a focus on Individual Retirement Accounts (IRAs) and 401K accounts to Roth IRAs as the plan would replace the IRA and 401K deductions with a flat credit. This new flat credit makes it far more advantageous to utilize a Roth IRA rather than the standard Simple IRAs or 401K that are common in Florida. While also introducing a new $15,000 credit for first-time homebuyers which would help Florida first-time homebuyers in conjunction with the Florida Housing programs.
How will the Biden tax plan affect Capital Gains?
Long-term capital gain investments are currently taxed at around 15%, however, the new plan will incorporate a new 3.8% increase across the board for a maximum of 23.8%. However, possible capital loss carryovers from 2020 into 2021 may help to shelter against the increase in the tax rate for such capital gains. Looking ahead into the future of the administration and a Democratic Congress, capital loss carryovers will continue to be an important part of sheltering against increase in capital gain taxes, particularly for those in Florida who depend on long-term capital gain investments as sources of income in retirement.
How important are the changes under the Biden tax plan?
Although Congress has the major say in what will actually become law when it comes to tax reform, the Biden Administration will still play a pivotal role in the shaping of the legislation and pushing for greater reform. However, whether the progressive agenda of the administration will hold with the moderate Congress will be determined in the next two years as both Congress and the administration begin to discuss the tax reform points mentioned above. Florida residents and businesses should plan accordingly to prepare and hedge against negative impacts from tax hikes or shifts in the exemptions under the proposed plan.
If you need advice on Tax Law Issues, do not hesitate to contact one of our experienced business attorneys at EPGD Business Law, EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.
