A White House official has defended plans to propose a sharp rise in the top capital gains tax rate to 39.6%, saying the changes would only hit the richest 0.3% of Americans, according to a report.
A senior official in President Joe Biden’s White House told the Financial Times the wealthiest Americans had been growing disproportionately richer.
“Many, many of the returns at the very top are what they call above-market rates of return, rents and so on,” the official said. “Taxing the people who are doing extremely well in the economy is one way of asking somewhat more from that.”
Biden’s plan would propose raising the top marginal income tax to 39.6% from 37% and bringing capital gains tax in line with that for those earning more than $1 million a year.
When combined with the 3.8% surtax on investment income put in place under Barack Obama, it would take the tax rate on the wealthiest investors to 43.4%.
Republicans and many investors have criticized the plan to dramatically raise the tax, arguing that it will reduce investment and damage the economy.
However, the Biden official told the FT: “This is consistent with what the President had said on the campaign trail, which was that we needed to fundamentally reform parts of the code that affect the very, very richest or very highest income Americans, in ways to make sure that it is fair and not rewarding wealth over work.”
The 55 publicly traded companies would have paid an estimated $12 billion in federal taxes if not for corporate tax breaks in 2020, including $8.5 billion in tax avoidance and $3.5 billion in tax rebates, the report found using regulatory filings and other information.
Nearly half of the companies have avoided paying federal taxes for the last three years, according to the report. Nike, FedEx, and DTE Energy were among 26 companies that recorded $77 billion in combined pre-tax income in the past three years, but did not pay any federal income taxes.
The news comes at the same time President Joe Biden looks to raise taxes on corporations. The White House announced this week that it plans to limit the number of companies that do not pay federal taxes, as well as increase the corporate tax rate to 28% – raising an estimated $2 trillion over the course of 15 years.
How do multi-billion dollar companies avoid federal taxes?
ITEP’s data found some of the nation’s biggest companies have been avoiding federal taxes for decades, dating back to the Reagan administration. The companies, which encompass a wide variety of industries, use a range of tactics, including tax exemptions and deductions.
While company tax returns are private, publicly traded companies must file financial reports that include information on federal income taxes. Using the financial reports as well as data on each companies’ pre-tax income, ITEP was able to analyze some of the major resources the companies used to avoid paying federal taxes.
In 2017, the Trump administration’s Tax Cuts and Jobs Act of 2017 amended the Internal Revenue Code of 1986, the Washington-based research group said the act failed to address major loopholes in the tax code.
“When President Trump signaled his intention to cut corporate taxes in 2017, he and Congress had an opportunity to pare back the many loopholes that have allowed companies to avoid tax on much of their income since the 1980s,” the report said. “Now, with three years of data published on the effective tax rates paid by publicly traded companies, it is clear that the Trump law has not meaningfully curtailed corporate tax avoidance and may even be encouraging it.”
The 2017 tax bill dropped the top corporate income tax rate from 35% to 21% – a corporate tax rate that is below average for most countries represented in the Organisation for Economic Co-operation and Development, a group that represents 37 developed countries. The act also allows companies to immediately write off the cost of new equipment and machinery.
The CARES Act made it even easier for companies to avoid taxes
The $2.2 trillion CARES Act which was passed last year to help alleviate the economic distress of the pandemic and help businesses survive, provided the 55 companies with over $500 million in tax breaks, according to ITEP.
Dozens of publicly traded companies used provision from the CARES Act that temporarily allowed businesses to use losses in 2020 to offset profits earned in previous years, according to the research group.
FedEx was one of the companies that used the CARES Act to reduce tax bills from prior years when the tax rate was higher.
The company told Insider the CARES Act “helped companies like FedEx navigate a rapidly changing economy and marketplace while continuing to invest in capital, hire team members, and fund employee pension plans.”
Nike, HP, Salesforce, Duke Energy, and DTE Energy did not respond to a request from Insider for a comment.
In its report, the left-leaning research group pointed to several tax code amendments that could cut down on the number of companies that do not pay federal taxes, including a “minimum tax” for profitable companies, as well as cutting back on tax breaks for public companies.
Biden said he was aware the company was one of many Fortune 500 companies that use loopholes to avoid taxes, while middle class families are not afforded the same opportunities and pay over 20% tax rates.
“I don’t want to punish them, but that’s just wrong,” Biden said.
Tax season, when it will be time to file your 2020 taxes, is right around the corner.
If you donated to charity this year, you can claim a deduction worth up to $300 on your tax return.
Remote work became the norm in 2020, but depending on where you worked from and for long, you may have additional taxes to pay.
This article is a contributed piece as part of a series focused on millennial financial empowerment called Master your Money.
Your financial life may have changed a lot this year, including experiencing some “firsts” that could mean your tax situation will be different when you file your 2020 tax return next year.
However, there are still opportunities to take control of your finances, including planning around your tax refund. I want to help you to get smart about your situation now, so you know what to expect and what steps to take now so there are no surprises at tax time.
Here are two tax issues to be aware of this year:
1. Claiming the new charitable tax break
Let’s start with good news: a new tax break allows people who don’t itemize the opportunity to claim a charitable deduction for cash donations (or a cash equivalent, such as a check, credit card, money order, or mobile payment).
You’ll get to deduct up to $300 from gross and taxable income on your return, reducing the amount of taxes owed. Keep in mind, the donation must be made to a qualified charitable organization, must be a cash or cash equivalent donation, and must be made by December 31, 2020. Donations of clothing and other non-cash items don’t qualify.
The rules for recordkeeping still apply for the donation. If you donate less than $250, you must have either a bank record such as a cancelled check or credit card statement or a receipt showing the name of the charity, date and amount of the donation. If you donate $250 or more, you need a written acknowledgment from the charity.
2. Paying income taxes while working in a different state
The pandemic closed many offices and sent people home to work. If working remotely means you don’t cross a state line you usually cross or, in some cases, don’t enter a different city, you should keep detailed records of:
When you started working from home
If and when your employer closed your office
If and when your employer reopened your office and invited you back to work
If and when you returned to your office
Generally, cities and states that have an income tax only tax income of people who live or work in that city or state. If you are one of the millions of Americans working from home, it is possible you will owe tax only to the state where you live and work beginning from the time you started working from home. These records will help you and your tax professional determine how to allocate your earnings between multiple states and cities should that be the case.
Accurately allocating your wages in 2020 as a remote worker and ensuring the correct amount gets reported to each state and locality will result in some taxpayers receiving a refund and others owing tax. The rules for each state are different and some rules are changing during the year so tracking the state and local rules and decisions will be important if you normally work in multiple states.
Kathy Pickering is the chief tax officer at H&R Block, and a member of BI’s Money Council.