Impact of President Biden’s Tax Proposals on Divorce

With the election behind us and President Joe Biden having taken office, it’s a good time to consider the impact that President Biden’s tax proposals might have on divorce planning.

Marcum Advisors are often retained to work with attorneys and divorcing couples to estimate the after-tax cash flow that will be available to the Husband and Wife after a divorce to help determine an appropriate amount of marital support, and we are often called upon to testify at divorce trials and hearings regarding marital support and tax matters. To that end, we often prepare cash flow scenarios estimating the income that will be available to the Husband and Wife after the divorce, including the impact of marital support received and paid, and the income taxes associated with that income to estimate the after-tax cash flow that each party will have.

The analyses we currently prepare consider current tax law including the tax changes from the Tax Cuts and Jobs Act (TCJA) signed into law by President Trump in 2017. With a Biden Presidency, we need to begin to think about tax changes that may be on the horizon and how those changes may impact divorcing couples going forward.

Some of President Biden’s tax proposals from when he was still a candidate that may impact cash flow available to divorcing couples include:

Increase in individual income tax rates

In 2017, President Trump signed the TCJA into law. TCJA generally reduced tax rates overall, and reduced the highest individual income tax rate from 39.6% to 37%. The Biden Plan would revert the top individual income tax rate for taxable incomes above $400,000 to 39.6%.

Social Security tax

The Biden Plan imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, half of which (6.2 percent) is paid by employees. Currently, Social Security tax is imposed on wages up to $142,800 (in 2021). Wages in excess of the Social Security wage limit are not subject to Social Security tax. Under the Biden proposal, a “donut hole” would be created whereby wages between the wage cap and $400,000 are not taxed; wages in excess of $400,000 would then be subject to Social Security tax.

Long-Term capital gains

The Biden Plan taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million rather than at the current top capital gain rate of 20%. This would negatively impact business owners trying to minimize taxes as they consider selling a closely held business.

Itemized deductions

The Biden Plan caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000 and restores the Pease limitation on itemized deductions for taxable income above $400,000. Taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.

Children

The Biden Plan includes two significant proposals concerning tax credits related to children. These proposals, if passed, may cause couples to spend more time considering which parent will claim dependency exemptions for children to maximize tax benefits available to the marital estate.

1. Child and Dependent Care Tax Credit (“CDCTC”). The Biden Plan expands the CDCTC from a maximum of $3,000 in qualified expenses for one qualifying child ($6,000 for more than one qualifying child) to $8,000 ($16,000 for multiple dependents) and increases the maximum credit rate from 35 percent of qualified expenses to 50 percent.
2. Child Tax Credit (“CTC”). Under TCJA, the dependency exemption was eliminated and was replaced by an expanded CTC. The CTC provides a tax credit of up to $2,000 per child under age 17. The CTC begins to phase out for Single taxpayers with AGI over $200,000 and Married taxpayers with AGI over $400,000. The Biden Plan increases the CTC from a maximum credit of $2,000 to $3,000 for children ages 6 to 17, and $3,600 for children under age 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.

Corporate tax rates

TCJA reduced corporate tax rates from a maximum rate of 35% to a flat 21% tax rate on taxable income. The Biden Plan would increase the corporate income tax rate from 21% to 28%.

Qualified Business Income Deduction (“QBID”)

TCJA also provided for the QBID (Section 199A) which allows a tax deduction of up to 20% of certain income for the owners of flow-through entities (S corporations and partnerships). The Biden Plan would phase out QBID for taxpayers with taxable income over $400,000.

It is difficult to predict which of President Biden’s tax proposals will become law, what the final law would look like, or when proposed tax changes may take effect. Regardless, couples should be aware of the proposed changes and how they may affect after-tax income available to both parties as they maneuver through the divorce process.

Please contact your Marcum professional for any questions or assistance.