One of the main questions many people have in their minds as the Biden Administration moves into full swing is what potential tax changes to expect moving forward. Any answer has major implications for both businesses and individuals, with big questions as well about what anticipated changes might mean for the economy, including in the state of California, going forward.
While many answers are still in progress or even extremely speculative, plenty of well-connected minds are starting to queue up the questions and pose some theories about the answers. Of course, many of the changes the Biden Administration wants may be tweaked or even radically altered as the political process moves forward. But the anticipated changes to the tax code may be substantial and wide-ranging, so it’s worth taking a moment to ponder what we might be able to expect. Here’s just a touch of what many experts are saying.
Increases to the Corporate Tax Rate
The Biden Administration would reportedly like to hike the corporate tax rate from the current 21% to 28% — which is still lower than the previous 35% top tax rate. However, many in the know think the final corporate tax rate will be more in the 25% range.
Related Corporate Tax Changes
Many anticipated tax changes seem to focus on providing incentives to keep or return jobs to the United States from overseas. Among the other corporate tax changes, many of which are specific to the business in certain industries, are the following:
- A “minimum tax” of 15% on corporations booking more than $2 billion in income
- An offshoring surtax on U.S. companies producing profits overseas for sales occurring in the United States. This surtax (or penalty, as some see it) for offshore activities would also apply to offshore services, including, for example, overseas call centers.
- An increase of the GILTI (global intangible low-taxed income) rate on foreign-sourced income from 10.5% to 21%, with no exclusions.
- An end to deductions for consumer drug advertising expenses
- A 100% repeal on bonus depreciation
- A repeal of tax preferences for fossil fuel companies
- An end to deductions and write-offs for companies moving production or other jobs overseas
Anticipated Corporate Tax Credits
Tax credits and incentives also focus on bringing jobs back home, as well as on environmental concerns. Among the anticipated credits are expanded tax credits and new incentives for small businesses, as well as businesses in the carbon capture, manufacturing, and renewable energy sector. In addition, expect to see a 10% “Made in America” tax credit for foreign jobs, including call center jobs, brought from overseas to the United States.
Increased Personal Taxes for Taxpayers with Incomes Over $400,000
One of the most touted tax changes coming down the road is an increase in the tax rate for taxpayers making more than $400,000 per year. The top tax rate for that income bracket will rise to 39.6% from the current 37%. In addition, itemized deductions will be subject to a cap of 28%. The Biden Administration has stated repeatedly that no taxpayers with income under $400,000 will see an increase in their tax rates.
Increases in Capital Gains Tax Rates
High-income taxpayers, probably those with an adjusted gross income of over $1 million, are expected to see an increase in capital gains tax rates as well as on dividend income. However, it’s not clear what kind of increase to anticipate over the current rate of 23.8%. While the number of 43.4% has been floated by some, others expect the Senate to balk at any number higher than 31.8%. All those figures include the 3.8% tax on net investment income.
Tax Cuts for Low-Income Families
While high-income households are likely to feel a bit of a tax pinch, lower-income families may reap benefits through anticipated tax cuts. The Child and Dependent Tax Credit may rise to $8,000 per year from its current level of $3,000, with a $16,000 cap per household. That credit should infuse more money into the economy by putting spending cash into the hands of households that need it for basic household or educational expenses.
Changes to the Cap on State and Local Tax Deductions
Currently, federal income tax deductions for state and local taxes (SALT) are capped at $10,000. That cap hits hard for many California taxpayers, who pay a lot in local taxes, including property tax. The cap may change in ways that are tough for some tax payers, less so for others.
Word is that the cap may be repealed entirely — but perhaps replaced with various limitations on itemized deductions. Those limitations may include a 28% on the value of itemized deductions for households earning over $400,000. While the removal of the cap sounds like potential good news for homeowners and other middle-class taxpayers, many may find that the changes mean they can no longer itemize deductions, which could increase their tax burden.
Tax Implications for Remote Workers
As the pandemic drove workers out of the office and into their homes, new tax issues have begun to arise. Employers are required to withhold income taxes and Social Security/Medicare in the state where the employee lives. Before the pandemic, this rarely caused any issues, as employees typically live near where they work.
Now, however, many office-based employees are working in other states. As a result, some states have implemented legislation aimed at capturing income taxes from remote workers whose employers are located across state lines. Notably, New York is now demanding state income tax from non-New York residents who work for employers based in the state.
This means employers need to be careful to check on employees’ locations and to investigate state reciprocity rules to make sure they’re paying taxes at the appropriate rate and to the appropriate state. Employees may find themselves in a quandary if they find two states are demanding state tax on their income.
Many of the above proposals haven’t been well-defined yet, and certainly many face steep political opposition before they can be voted into effect. Others may find themselves subject to compromises before they become law. Keep an eye on these areas of tax law, however, to start to plan for both your business and personal tax situation in 2021.
As people get back to work and as we all try to adjust to the new normal, remember that Marquee Staffing is always here for you. As your business ramps up and looks for new talent, we are ready to help you take your company around the next corner to whatever lies ahead. Contact us today!