One of the most common questions people are asking is what affect Joe Biden’s presidency will have on their tax bill. The answer to this question depends on a few important factors. First, in most cases, your tax bill will not increase unless you have a yearly income exceeding $400,000. The second factor is if the Democrats will control the White House, the Senate, and the House of Representatives. If the Republicans maintain their control over the senate, it is unlikely that Biden will be able to fully implement his economic policies. However, it is important to prepare for the instance in which Biden is able to fully implement these policies. Below is a list of the major tax changes Biden plans on implementing as well as the tax cuts he plans on creating.
Tax Increases
President-elect Joe Biden has proposed increasing taxes on the wealthiest Americans and corporations in order to generate the massive amount of income he views necessary to bring the U.S. out of the Covid-19 induced economic decline. While there are multiple areas Biden is focusing on, the tax code is inevitably the most important part of his plan to help the nation move past its current fiscal challenges.
Below are the examples of how taxes will either increase or decrease for certain individuals.
Ordinary Income
The first part of Biden’s tax plan will increase taxes on those with yearly incomes above $400,000. The ordinary income tax rates for individuals in this top income bracket will increase from 37 percent to 39.6 percent.
Capital Gains
As of now, the capital gains tax rate is 23.8 percent. Thus, if someone buys an asset for $10 million yet when they decide to sell the assets, they are worth $20 million, the person will have to pay taxes on the increased value. So if the person decided to liquidate their entire portfolio, they would be paying $2.38 million in federal income tax alone.
Additionally, if you sell a stock after owning it for less than one year from the date you purchased it, you will be subject to short-term capital gains. Short term capital gains taxes have the same rate as ordinary income. Thus, under Biden’s plan, the short-term capital gains tax could be as high as 39.6 percent. The smarter move is to hold your investment for longer than one year. The reason for this is that it will automatically lower your tax rates to 15 – 20 percent. Finally, if you earn $1 million per year, you will pay higher than ordinary tax rates on long term investments. This would effectively raise the long-term investment tax for high earners from 20 percent to 39.6 percent.
Payroll Taxes
Another tax increase would be aimed at shoring up the Social Security system. As of now, only the first $137,700 someone makes in a year is subject to the 6.2 percent social security tax. However, Biden wants to make it so that individuals will have to pay the tax for the first $137,700 they make plus any amount they make above $400,000. Further, any income above $400,000 will be subject to the 6.2 percent tax and employers will also be taxed the additional 6.2 percent for employees that make above $400,000. Finally, self-employed individuals must carry the 12.4 percent tax by themselves.
Qualified Business Income Deduction
Under the Tax Cuts and Jobs Act, those who operate S corporations, partnerships, or sole proprietorships can claim a 20 percent reduction on qualified income earned. In this system, the effective top tax rate goes from 37 percent to 29.65 percent. Under Biden’s plan, this deduction would be phased out if a business has a yearly income of over $400,000.
Itemized Deductions
Biden plans on making two major changes to itemized deductions. First, Biden would reinstate the Pease limitation. This limitation would reduce the total taxpayer itemization by 3 percent for every dollar earned exceeding $400,000. Secondly, Biden will cap the itemized deduction rate to 28 percent. However, this 28 percent benefit limitation will not apply to those making under $400,000
Corporate Tax
The last piece of Biden’s tax plan concerns corporate taxes. He plans on raising the top rate of corporate taxes from 21 percent to 28 percent. Additionally, he is planning on implementing a 15 percent tax on large corporations that have a $100 net income.
Estate Tax
If Biden holds his electoral college lead and secures the White House, these gift and estate tax exemptions will likely lower back down to at least $5 million for an individual sooner than 2025. This is particularly likely if the Democrats also take control of the Senate. Additionally, many are concerned about the effects of Biden’s proposal for the highest earners. This tax would increase the capital gains tax rate for individuals earning over $1 million to 39.6 percent. Further, Biden is proposing to eliminate the step-up in basis provision in the tax code. This provision allows beneficiaries who sell their inherited assets quickly to largely avoid capital gains taxes.
Tax Cuts
Though Biden plans to increase taxes on those making over $400,000, he also plans on implementing a number of tax cuts and credits. These tax cuts include:
- An expanded child tax credit. The credit, which currently tops out at $2,000 — with only $1,000 of that amount being refundable — would be increased to a maximum of $3,600 per child and would become FULLY refundable.
- An increased child and dependent care credit. The credit would be increased from a maximum of $3,000 to a maximum of $8,000, or $16,000 per family. Fifty percent of the credit would be refundable.
- A credit of up to $5,000 for those caring for their elderly relatives.
- A $15,000 credit for first-time homebuyers.
- An expansion of the existing premium tax credit that makes state-sponsored health plans more affordable.
- Biden is also planning on creating a renter’s credit so that rent and utilities do not exceed 30 percent of their monthly salary.
- Finally, older taxpayers will be able to utilize expanded earned income credits.
From these tax cuts, Biden has stated that families making $88,000 – $160,000 will receive a tax cut of $540, and families making $50,000 – $90,000 will get a cut of $920.
Contact our Law Office for More Information
Finally, for more information on what does a Biden presidency mean for your tax bill, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.