The Biden budget proposes significant tax increases on the wealthy, corporations, and capital gains rates. Treasury Secretary Janet Yellen testified before the Senate Finance Committee about these proposals, but much will depend on the election’s outcome. If implemented, the corporate tax increase from 15% to 21% could significantly impact business profitability.
One notable proposal is the expansion of the Net Investment Income Tax (NIIT) on income over $400,000 to cover all pass-through business income not otherwise subject to the NIIT or self-employment taxes. This change aims to close loopholes and level the playing field for taxpayers in similar positions. Tax professionals should pay close attention to this one as it could have significant impacts on many smaller passthrough businesses.
Estate and gift tax strategies used by high earners to reduce their tax burden through complex trust arrangements are also targeted in the budget. Provisions such as the loss of step-up in basis for the very wealthy and limitations on life insurance strategies for customized investment products could significantly alter estate planning.
Tax professionals are already helping clients plan for the expiration of the Tax Cuts and Jobs Act’s (TCJA) estate tax reductions in 2025. If the TCJA sunsets as planned, the estate and gift tax exemption could decline to approximately $7.5 million per individual and $14.5 million for married couples, depending on inflation. That cuts the exemption almost in half from its current amount.
Other proposals include extending the Low-Income Housing Tax Credit to boost affordable housing supply and denying corporate tax deductions for employee compensation exceeding $1 million for both publicly and privately owned C corporations.
While the budget proposal is seen by some as a political statement, the November election will ultimately determine the direction of tax policy. Whether the Trump tax cuts are extended or Biden’s proposals pass will depend on which party controls Congress.
As tax professionals, it is essential to monitor these developments closely and be prepared to advise clients accordingly. While much remains uncertain, staying informed and proactive will help navigate the potential changes in the tax landscape post-election. Right now, understanding the goals of each party will help us to better prepare clients for what may be down the road.
Christine Gervais
