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How could Joe Biden’s victory impact the taxes of individuals and companies doing business in the United States?
Democrat Joe Biden’s victory in the U.S. presidential election could result in significant tax changes. The tax planning of Canadian companies doing business in the United States as well as U.S. citizens residing in Canada could both be affected.
Joe Biden wants to make major changes to certain aspects of the tax reform implemented by the Trump administration in 2017. In order to implement these changes, he will need to reach an agreement with Congress – the House of Representatives and the Senate.
Individual taxes
One of the Democrat’s key measures is to raise the top federal personal income tax rate to 39.6%, a 2.6 percentage point increase. In 2021, the top rate will apply to married individuals who report a combined income of over US$628,301.
Biden would cap the value of itemized deductions, such as medical expenses and donations, at 28% for taxable income higher than US$400,000. This means that each dollar of deductible expenses would reduce the federal tax bill by no more than 28 cents.
He also wants to increase the maximum capital gains tax rate on investments held for more than one year to 39.6%. This measure would apply to taxpayers with annual income greater than US$1M. The current maximum rate is 20% for married individuals with income over US$496,600.
In addition, currently, employees and employers pay equal shares of a 12.4% payroll tax to finance social security measures. The maximum taxable business income is $137,700. Biden would eliminate this ceiling for income over US$400,000, while income between US$137,700 and US$400,000 would remain exempt.
Biden also wants to review a highly political issue: estate taxes. Even if an individual is not a U.S. citizen, his or her estate may be subject to U.S. estate tax if the market value of the U.S. property owned is greater than US$60,000. However, no estate tax is payable if the value of the worldwide estate is below the applicable exemption threshold, which is US$11.58M in 2020.
Biden wants to reduce the threshold to its 2009 exemption level of US$3.5M. Raising this threshold was an important part of the 2017 tax reform. It should be noted that under current legislation, this threshold will be reduced to US$5.49 million in 2026. Estate planning should therefore take these possibilities into account.
Biden also wants to eliminate the step-up in basis inheritance tax provision that allows heirs to increase the tax cost of inherited property to the market value.
Corporate taxes
Biden is considering a considerable federal corporate income tax hike from 21% to 28%.
The rate was 35% before the 2017 Trump reform and the reduction to 21% made it more competitive than that of the United States’ major trading partners, including Canada. An increase in the U.S. tax rate would therefore restore Canada’s tax rate advantage. But it would also give the Canadian government the opportunity to raise its corporate tax rate, while maintaining a competitive rate. Something to watch out for…
In addition, the Democrat wants to introduce a 15% minimum tax on adjusted tax revenues for corporations with book profits of US$100M or more. Corporations would pay the higher of the regular corporate income tax and the 15% minimum tax on adjusted income. It appears that the calculation of adjusted income will allow for the use of losses carried forward and foreign tax credits. This bold measure is intended to limit the possibility of paying little tax through certain tax strategies.
Biden also plans various measures to counter the relocation of U.S. activities abroad.
Other proposals include restructuring global intangible low-taxed income (GILTI). U.S. multinationals currently pay a minimum 13% tax on income generated by assets held by a foreign subsidiary, failing which the U.S. federal government will tax such foreign income. Biden would double the minimum tax threshold to 21% on all earnings and would apply it separately to each country rather than all countries combined.
If such a measure were adopted, a U.S. citizen resident in Canada with a Canadian corporation that pays less than 21% tax in Canada could be subject to the special GILTI tax.
Joe Biden tax platform
The Biden platform is based on his statements as part of his campaign, official campaign releases and the Biden-Sanders Unity Task Force. This information comes from a publication by our colleagues at Grant Thornton in the United States.
Corporate rate
- Raise rate to 28%;
- 15% corporate minimum tax on book profits.
Business tax cuts
- Expand new markets tax credit;
- 10% advanceable to reopen closed plants, retool facilities, and expand U.S. production (including returning overseas production);
- Establish tax incentives for manufacturing drugs and other critical products in the U.S.;
- “Tax break” for small businesses that start a retirement plan;
- Tax credits to small businesses to offset costs of a workplace savings plan;
- Expand low-income housing credit;
- Tax credits to businesses to offset cost of building child care facilities at places of work.
Business tax increases
- Endorsed financial transactions tax, but hasn’t released specific proposal;
- Restructure GILTI as a 21% global minimum tax;
- 10% surtax for on profits of U.S. companies from overseas production for sale in the U.S.;
- Phase-out pass-through deduction for taxpayers with more than $400,000 in business income;
- “Claw back” tax incentives when companies move jobs overseas;
- Denial of deductions for “moving jobs and production overseas”;
- Implement “strong anti-inversion regulations and penalties”;
- Tax penalty on drug manufacturers that increase prices more than inflation;
- Repeal deduction for prescriptions drug advertising;
- Impose sanctions on foreign tax havens to improve compliance;
- Tighten rules on classification of workers;
- Tighten Opportunity Zone rules.
Energy and climate
- Incentives for carbon capture technology;
- Credits aimed at new manufacturing investments and low-carbon technologies;
- Restore full eclectric vehicle credit;
- Tax credits to combat climate change in housing;
- End “fossil fuel tax breaks”;
- “Scale-up” tax credits for renewable energy projects that meet certain labor standards;
- Incentives for manufacturing facilities that make energy efficient upgrades and improvements;
- Revive Cash for Clunkers program.
Individual rates
- Raise top rate to 39.6%;
- Cap value of tax deductions at 28%;
- Impose 12.4% payroll tax for Social Security on wages overs $400,000.
Capital gains
- Tax capital gains as ordinary income at top rate of 39.6% if income is more than $1M.
Estate tax
- Eliminate stepped-up basis for inherited capital assets;
- Restore estate tax rates to “historic norms”.
Individual tax cuts
- Expand child tax credit to $8,000;
- Expand Earned income tax credit (EITC) to workers over 65;
- Expand child and dependent care tax credit to be fully refundable and advanceable;
- Eliminate income cap for premium tax credit and lower cost limit to 8.5% of income;
- “Equalize” tax benefit of defined contribution plans for low-middle income taxpayers;
- Create “automatic” 401(k)s;
- $5,000 credit for informal caregivers;
- Catch-up contributions caregivers;
- Create refundable, advanceable tax credit of up to $15,000 for first time home buyers;
- Renters’ credit to reduce low-income family rent and utilities to 30% of income;
- Exclude student loan cancelation from income;
- Increase Affordable Care Act (ACA) tax subsidies;
- Refundable child care credit of up to $8,000 for one child or $16,000 for two children or more.