Two major forces bearing down on the American tax landscape may signal impending rate increases and put a premium on strategic tax planning. The country’s fiscal response to the pandemic and the upcoming federal election amount to storm clouds that taxpayers would be wise to heed during the rest of 2020 and beyond.
Two of RSM’s leading tax professionals discussed the imposing factors in RSM’s “Tax Policy Now” audiocast. Jim Alex, RSM’s national tax go-to-market leader, explained that the federal government in June borrowed close to $800 billion, which is 100 times the amount it borrowed in June 2019.
“Therefore, either way, rates are likely to go up regardless of who is president,” Alex said.
Former Vice President Joe Biden, the presumptive Democratic nominee, leads President Donald Trump in many polls, with fewer than 100 days until Election Day on Nov. 3. Biden’s tax plan includes various rate increases. Patti Burquest, principal in charge of RSM’s Washington National Tax practice, explained highlights of the plan, specifically how it would affect domestic and international businesses and individuals.
For domestic businesses, Biden’s plan calls for raising the corporate tax rate from a very low 21% to 28%. Also, if a company has zero tax liability, there would be a minimum tax. If its book revenue is at least $100 million, that corporation would be subject to a 15% minimum tax—with some offsets from net operating losses and foreign tax credits. In a provision affecting businesses and individuals, Biden’s plan would reduce the section 199A partnership 20% income deduction to zero for individual filers with income of more than $400,000.
The most important change for international businesses under Biden’s plan would be an increase in the global intangible low-taxed income (GILTI) tax rate. It would double from 10.5% to 21%.
For individuals, Biden’s plan calls for a rate increase for the top bracket—taxable incomes of $400,000 or more—from the current 37% to 39.6%. And for capital gains, the rate would increase to 39% for a person with taxable income of over $1 million, effectively doubling the capitals gains tax. Another important change would be the elimination of the step-up in basis upon death.
What, then, should businesses and individuals consider, given the potential tax increases under Biden’s plan—or the likelihood that tax rates would increase in a second term for Trump because of immense government spending due to the pandemic?
“Normally, we defer income and we accelerate deductions, and that’s the foundation of tax planning,” Burquest said. “But as we’re looking ahead here with a possible rate increase, it’s really planning in reverse. We want to accelerate income into a potentially lower tax year—2020—and defer deductions to later years when the tax rate may go up.”
Watch the Tax Policy Now recording for more insights and analysis of tax issues stemming from the economic and public health crises.