With the inauguration of President Biden now behind us, it is time to look ahead to what the next four years could look like — specifically as it relates to our finances.
While Biden has made some announcements regarding his desire to expand the Affordable Care Act (ACA) and Medicare, he has not been as vocal about some of his other economic and domestic policy initiatives.
So, what does a Biden administration mean for your wallet? Here are a few things that we think you could expect to see implemented in 2021 and beyond.
Changes to Income Tax Rates
While he may struggle to get tax reform through a polarized Congress, President Biden intends to raise taxes on the highest earners. More specifically, taxation on annual incomes over $400,000 (although whether this threshold applies to individuals or joint filers remains unclear), will return to the pre-TCJA rate of 39.6%.
Additionally, Biden plans to impose a 12.4% Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees.
This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700 to $399,999 are not taxed.
Changes to Tax Deductions
Biden also plans to take aim at the Qualified Business income (QBI) tax deduction. His plan would eliminate tax deductions for pass-through business owners (e.g., partnerships, LLCs, S corporations, and sole proprietors) whose individual annual income is $400,000 or more.
Next, Biden wants to cap the value of the rate at which itemized deductions can be taken to 28%. This will affect those in the tax brackets above 28%, as their rate to determine itemized deductions would be reduced from their income tax bracket.
Finally, Biden wants to establish a flat retirement contribution credit, as determined by a specific percentage (currently anticipated to be 26%) of the contribution amount to replace deductions of those retirement account contributions.
This would, in effect, lower the tax burden for taxpayers in tax brackets under the proposed set rate (incentivizing taxpayers in lower tax brackets to contribute to tax-deferred retirement accounts).
Changes to Tax Credits
As you can see, Biden’s plan aligns with the goals of the Democratic Party. In other words, he wishes to institute moderate tax increases for wealthier individuals while reducing the tax burden on lower-income households and larger families.
To help with the latter, the Biden administration has proposed a number of changes to existing tax credits, as well as some completely new tax credits:
- Child Tax Credit – The current credit of $2,000 per child under age 17 would be increased to $3,600 for children under age 6, and $3,000 for all other children under age 17.
- Child and Dependent Care Credit – The current credit of a maximum of $3,000 for one child, and $6,000 for two or more children would be expanded to a refundable credit of $8,000 for one child, and a whopping $16,000 credit for two or more children.
- First-time Homebuyer Credit – This is a new refundable and advanceable credit of up to $15,000. While specifics surrounding the credit have not yet been made public, it would most likely mirror the First-Time Homebuyer Credit first introduced during the Bush administration in 2008, and later expanded by the Obama administration in 2009. In both situations, the maximum credit was capped at 10% of the purchase price of the home.
- Caregiver Credit – This is another new credit of up to $5,000 that would be created to assist individuals who provide informal care to those in need of long-term care. Additionally, Biden’s plan calls for enhancing the current tax breaks associated with the purchase of long-term care insurance, though how that would be done is not entirely clear.
- Earned Income Tax Credit (EITC) – Biden plans to impose expansions to the EITC for childless workers aged 65 or older. This would also provide renewable-energy-related tax credits to individuals.
Changes to Capital Gains and Estate Taxes
Under the proposed Biden plan, long-term capital gains and qualified dividend tax rates will likely increase to ordinary income tax rates for income over $1 million (with the 3.8% surtax on net investment income to remain in place).
Additionally, the plan will eliminate step-up in basis for capital gains taxation and 1031 -exchanges would be eliminated for taxpayers with annual income over $400,000. One strategy to mitigate the impact of these proposed changes would be to target lower annual capital gains. Finally, Biden’s proposed tax plan would be a 50% reduction of the exclusion amount for estate and gift taxes, from $11.58 million of today to the pre-TCJA amount of $5.79 million.
What Does This All Mean For Your Wallet?
In short, if you make less than $400,000 annually and qualify for one of the tax credits listed above, you’ll likely have a reduced tax burden under the Biden administration.
However, if you or your business make more than $400,000 annually or you anticipate high capital gains, you can expect a sizable increase in your taxes. In any case, these figures are still somewhat hypothetical, as Biden’s plan will need to get through Congress and will likely need to be adjusted for members of both parties to come to an agreement.
If you’d like to learn more about Biden’s proposed tax plan, consult the experts at Crossroads Planning today!