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Biden Tax Increase Proposals: Sec.199A Phase Out

  • Written by Steel Rose

This blog summarizes some of the tax proposals of President-elect Joe Biden and other prominent Democrats.

Increased Individual Tax Rate

Biden would increase the top marginal income tax rate for individual taxpayers with income above $400,000 from 37% to 39.6% (the top marginal income tax rate in effect prior to the enactment of the Tax Cuts and Jobs Act (the “TCJA”)).[1] For income subject to the additional 3.8% tax on net investment income, the rate would be 43.4%.

Increased Capital Gains Tax Rate

Biden would increase the long-term capital gains and qualified dividend rate for individual taxpayers with income in excess of $1 million from 20% to the proposed ordinary income tax rate of 39.6%.[2] It is unclear whether the 39.6% rate would include the additional 3.8% tax on net investment income; if it did not, the marginal rate for capital gains could be as high as 43.4%.

Repeal the $10,000 Cap on the State and Local Tax Deduction

Biden would repeal the $10,000 cap on the state and local tax deduction. However, for taxpayers with income of more than $400,000, the 28% cap on the benefit of deductions and the restoration of the Pease limitation (both described below) will reduce the benefit of the repeal.[3]

Death as Realization Event

Under current law, the death of a taxpayer is not a taxable event. The basis of property acquired from a decedent is stepped-up to the fair market value at death, with the result that appreciation in the property during the life of the decedent is not subject to income tax. Biden would treat death as a realization event.[4] As a result, the decedent would be treated as if he or she sold all of his or her assets for fair market value at death and would be taxed on any unrealized appreciation at the rate applicable to long-term capital gains (which, in the case of taxpayers with income above $1 million, would be the ordinary income tax rate of 39.6%).

Limitations on Itemized Deductions 

Biden would cap the tax benefit of itemized deductions at 28% of value for taxpayers with income above $400,000.[5]

Biden would also restore the “Pease” limitation on itemized deductions. The Pease limitation would reduce the value of certain itemized deductions by 3% for every dollar of a taxpayer’s taxable income above $400,000, with a maximum reduction equal to 80% of the total value of the taxpayer’s itemized deductions.

For a taxpayer with itemized deductions, the 28% cap on the tax benefit of itemized deductions and the Pease limitation reduce the value of a taxpayer’s deductions – and increases his or her taxes – by 12.44% of the amount of the deductions.[6]

Phase Out of Passthrough Deduction

Section 199A provides individuals (and certain trusts and estates) with a “passthrough deduction” of up to 20% that reduces the income tax rate from 37% to 29.6% for ordinary income items from certain passthrough entities, such as partnerships, S corporations, REITs, trusts and estates. Biden would phase out this deduction for taxpayers with taxable income above $400,000.[7] To read more click here

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