Jeffrey Levine: Top 10 Tax Details in Biden Plan Advisors Should Know

Among the many details included and not included in President Joe Biden’s revamped tax plan announced Thursday are 10 items in particular that advisors, their clients and taxpayers in general may want to pay particular attention to, according to Jeffrey Levine, Buckingham Wealth Partners director of advanced planning and Kitces.com director of advisor education.

Although there are many tax changes proposed in the updated version of the bill, there are “far fewer than I’d have guessed a few weeks ago,” Levine said, kicking off a a long Twitter thread Thursday night.

As expected, Biden’s framework proposes raising the top marginal individual income tax rate to 39.6% for high-income taxpayers.

“This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500,” according to an 18-page breakdown of the revamped proposal by the House Ways and Means Committee.

The framework, which also increases the top capital gains rate to 25%, was “a year in the making but seems we now have what’s likely the final bill text,” Levine said.

But he predicted in the thread that at least one more change may happen before it’s voted on, saying one “BIG notable NOT in the bill is SALT relief.” He was referring to the state and local tax deduction cap that was included in the sweeping tax overhaul of 2017.

Several Democrats in Congress have been trying to get the cap repealed because it hits homeowners in New York and other blue states.

Levine guessed that Democrats were likely “still deciding between” a temporary full repeal or a permanent “higher-than-now cap.”

Therefore, it probably “makes sense to hold off making Q4 state tax estimates or property taxes that can be paid in Q1 2022,” he said.

Here are the top 10 new tax-related changes in the $1.75 trillion tax and spending plan that Levine pointed to in his Twitter thread (not including retirement-related ones):

1. The inclusion of S corporation profits as investment income for high-income taxpayers.

This is “the single item likely to increase an individual’s current tax rate the most,” according to Levine.

He pointed to Sec. 138203, Application of Net Investment Income Tax to Trade or Business Income of Certain High Income Individuals, tweeting: “This could make S corps a LOT less attractive for many higher earners.”

The provision in question “amends section 1411 to expand the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates,” according to the House Ways and Means Committee.

Although Levine said he heard many people talking about how this is going to impact partners and sole proprietors with high income, he tweeted: “In general, it won’t. This is about ‘picking up’ income that currently escapes both employment taxes and the NIIT.”

S corporation profits “would be right at the tippy-top,” Levine tweeted, adding: “This provision begins to phase in at the following MAGI thresholds:  Single/HOH: $400k – Joint/Qual Widowers: $500k And is fully phased in after a $100k phase-in range.”

2. There is also a new surtax on high-income taxpayers.

Specifically, there is a “5% surtax on MAGI in excess of $10MM for all individuals except separate filers ($5MM),” he tweeted.

3. There is a second surtax for higher-income taxpayers.

“On top of 5% surtax for taxpayers w/ MAGI as described above, there would be an ADDITIONAL surtax for individuals w/ MAGI < $25MM ($12.5MM for MFS),” Levine tweeted.

As a result, the “total top Federal rate for persons w/such stratospheric income would be: 37% +5% +3% +3.8% = 48.8%,” Levine said.

It’s “fair to say EXTREMELY few people will ever be subject to the surtax,” he tweeted. But an example of “where it’s more likely to come into play for advisors” would be on the sale of a large business or other asset, Levine said.

4. The limitation on excess business losses would be made permanent.

“Basically, if you have > $250k (single)/$500k (joint) of biz losses, the losses above that can’t be used to offset other non-biz income that year,” he warned.

5. Crypto, foreign currency transactions and commodities would be subjected to the wash sale rule.

Until now, the wash sale rule has “not applied to crypto transactions b/c the tax code says that it applies to ‘shares of stock or securities,’ neither of which describe crypto,” Levine pointed out. That has “allowed individuals w/ crypto losses to sell their asset, ‘bank’ the loss, and then quickly buy the asset back.”

6. The increased Child Tax Credit will be extended.

Another change is that the increased Child Tax Credit “would stick around one more year, for 2022, as would prepayments (though the thresholds would change,” Levine noted.

“This is MUCH shorter than [Democrats] wanted, but it’s a popular provision w/ at least some bipartisan support, so I think they’re banking on it getting extended in the future,” according to Levine.

7. Receiving unemployment will allow Americans to get maximum Affordable Care Act credits.

“Through 2025, receiving unemployment any time during the year would get you maximum O’care credits,” Levine tweeted, the “O’care” referring to Obamacare.

8. The exclusion of gains on qualified small-business stock sales would be reduced for high-income taxpayers.

“The exclusion on Qualified Small Biz Stock would be reduced for high earners (>$400k AGI),” Levine noted.

“Unfortunately for some, the change would apply as of Sept 14, 2021, so no way to sell now and lock in exclusion,” he added.

9. Several proposed and widely reported tax changes have not been included.

 Among the widely reported tax changes that had been proposed which are not included in the final bill are: an increased top ordinary income tax bracket, an increased top long-term capital gains tax bracket, and a reduced estate/gift tax exemption, Levine said.

10. Most Americans’ tax liability won’t change much.

“Given build-up around potential changes … most Americans’ tax liability will change remarkably little as a result of this bill,” Levine tweeted.