Background

The results of the November 3, 2020 election, with Democratic control of the White House and the House of Representatives and apparent Republican control of the Senate makes major changes in the Tax Code difficult in the next Congress.  Any number of upcoming events could end the apparent stalemate, including the January 2021 Georgia runoff elections and the 2022 midterm elections. Nonetheless, if the Democrats gain complete control of the White House, House of Representatives and Senate, they have announced the following potential tax law changes:

Individual Taxes

Income tax rates: Under the current law, there are seven tax brackets applicable from 2018 through 2025 under the Tax Cuts and Jobs Act (TCJA). They are 10, 12, 22, 24, 32, 35, and 37 percent.  The Democrats propose increasing the top marginal bracket to 39.6 percent, except for taxpayers earning under $400,000 per year.

Capital Gains and Dividends: Under current law, individual capital gains rates are 0%, 15%, or 20%, depending on the person’s taxable income. For 2021, the top (20%) rate applies to single filers earning over $445,850, $501,600 for “Married Filing Jointly” reporters, and $250,800 or $473,750 respectively for persons filing “Married Filing Separately” or “Head of Household,” respectively.  Democrats propose to increase the top capital rate for individuals earning over $1 Million. They also propose to eliminate the step-up in basis at death, but that has been tried before with no success.

Child Tax Incentives: Democrats have proposed increasing the Earned Income Credit (EIC) by an un-specified amount as well as increasing the Child Tax Credit (CTC) to up to $8,000 for one child and up to $16,000 for two or more children. The maximum amount allowed currently through 2025 is $2000. Additionally, they have proposed a new $5,000 tax credit for caregivers of individuals with certain physical or cognitive needs.

Limitation on Itemized Deductions:  Democrats propose to restore the limitation on itemized deductions for taxpayers with taxable income over $400,000.

Carried Interest: Generally, income that flows to a partner from a private investment fund is taxed at favorable capital gain rates with a 3-year holding period required for certain long-term capital gains and losses. Democrats propose to eliminate tax favored treatment of carried interests.

Payroll Taxes: In August 2020, President Trump promised to eliminate the payroll taxes deferred from September 1 to December 31, 2020 if re-elected. Democrats have made no such promise. Democrats propose to increase the Social Security wage base from its 2020 level of $137,700 to $400,000 per year.

Business Tax Policy

Corporate Tax Rates: Democrats have proposed raising the 21% maximum corporate rate to 28% and imposing a minimum tax on corporate book profits of $100,000 or more.

Qualified Business Income Deduction (QBI): Under current law, IRC Section 199A allows a deduction of 20% of qualified business income, REIT or Publicly Traded Partnership income – a deduction which is scheduled to expire after 2025. Democrats have proposed phasing out the deduction at income levels above $400,000.

Energy Tax Incentives: Various credits are available under current law for oil production, electric vehicles, solar, wind and other “green” energy. Democrats have proposed eliminating the tax incentives for fossil fuels as well as restoring the full electric vehicle tax credit and various credits and deductions to incentivize residential and commercial energy efficiency.

International Tax Policy

Repatriation: Currently, U.S. corporations can defer payment of U.S. income tax on profits from offshore subsidiaries until the money is repatriated. Democrats have proposed ending these incentives as well as establishing a “claw-back” provision to “force” a return of public investments and tax benefits when companies close U.S. operations and move American jobs overseas, as well as tightening anti-inversion laws.

GILTI: The “Global Intangible Low-Tax Income” tax (GILTI) was enacted under the TCJA as a base-erosion provision. GILTI is a tax on earnings that exceed a 10% return on a company’s invested foreign assets. Democrats propose doubling the GILTI tax rate on income earned by foreign subsidiaries from 10.5% to 21%.

Tax Policy and Health Care: The Affordable Care Act (ACA), or “Obama Care” as it is sometimes popularly known, created a number of new taxes and fees. Later the mandate for individuals to purchase health care insurance was repealed on a bipartisan basis. However, Democrats propose a variety of ways to increase the ACA coverage and lower its premiums. However, the constitutionality of the ACA is under consideration by the US Supreme Court and so the outcome could significantly impact any Democratic health care plans.