What You Need to Know About a Changing Tax Landscape

The changing of the guard is officially complete in Washington, D.C.

Inauguration Day proceeded with little drama. President Joe Biden entered the Oval Office ready to work, starting with several executive orders related to the COVID-19 pandemic. He also didn’t hesitate to get the ball rolling to dismantle several of the former President’s regulations.

As a result, many individuals and businesses look a bit like Senator Bernie Sanders in his oversized, handmade Vermont mittens right now. They’re calmly waiting, but they’re looking with a wary eye toward future tax policies from the new administration.

The reality is that the COVID-19 pandemic ignited massive spending by the federal government to limit the economic impact and help individual Americans. The deficit surged to $3.1 trillion in 2020, up from $984 billion in 2019. As it now stands, the current deficit accounts for nearly 15% of total U.S. GDP or the biggest percentage of GDP in 75 years.[1]

To combat the out-of-control deficit, President Biden is determined to raise taxes.

On the campaign trail in 2020, President Biden stated that he planned to eliminate the 2017 Tax Cuts and Jobs Act that the Trump administration enacted. Of course, he noted that his changes to the tax law were focused primarily on rolling back the provisions for corporations and the wealthy. President Biden promised to maintain the tax cuts for lower- and middle-class Americans, not raising taxes on individuals who make less than $400,000.

Still, any changes to the current tax law will likely meet gridlock in Congress.

As you know, the Democrats currently have control of the White House, House of Representatives, and Senate. But they have a very slim edge, given that the Senate is 50-50, with Vice President Kamala Harris the deciding vote in any tie-breaker situation. President Biden would need unanimous support from the Democrats and gain several Republicans’ support, to achieve the 60-vote majority necessary to avoid any gridlock on tax law changes.

So, it doesn’t look like the 2017 Tax Cuts and Jobs Act will be repealed in its entirety in the near term. But it’s still essential to understand President Biden’s proposed tax policies and how they could impact you and/or your business.

For individuals, President Biden’s tax policy changes would primarily impact those in the higher tax brackets. He has proposed decreasing the top tax rate on ordinary income from the current 37% back to the 39.6% tax rate from before the 2017 Tax Cuts and Jobs Act.[2]

But taxes on the wealthy wouldn’t end there.

President Biden also proposes lifting the tax rate on capital gains and dividends. Currently, capital gains and dividends are taxed at a 20% rate. Under President Biden’s proposed tax law, this rate would jump to 39.6%. His tax plan would also potentially raise the estate tax rate.

For corporations, President Biden looks to increase the corporate tax rate to 28%, up from the current 21%. Notably, the 28% tax rate would still be less than the 35% corporate tax rate that was in place before the Tax Cuts and Jobs Act was passed in 2017.

President Biden’s tax plan could also re-introduce the corporate alternative minimum tax, involving a 15% minimum tax rate on corporations that earn $100 million or more.[3]

Now, that’s a lot of numbers to crunch, and we understand that it can be a bit overwhelming to consider how President Biden’s proposed tax law could impact you or your business. But remember, these are all still proposed tax law changes. None of these tax rates have been presented to Congress, let alone voted on yet. So, what will become a reality remains to be seen.

In the meantime, here at Nicollet Investment Management, we encourage our clients to stay on top of potential tax policy changes and to plan accordingly once these changes go into effect. If you would like to discuss your situation and how tax policy changes could impact you, please don’t hesitate to reach out to us today.
Please click here for important disclosures.

[1] https://www.cbo.gov/publication/56746

[2] https://www.grantthornton.com/library/alerts/tax/2020/Insights/biden-win-changes-tax-policy-planning-outlook.aspx

[3] https://www.forbes.com/sites/forbesfinancecouncil/2021/01/26/what-changes-you-could-see-under-bidens-tax-plans/?sh=60f62f2750a0