What was the biggest selling point in former President Trump’s reelection campaign? It can be summed up in two words…
In fact, Trump successfully positioned himself as the “no new taxes” alternative to Biden’s stanch “tax the rich” stance.
And many of the 75+ million citizens that cast their votes for Trump did so because of a massive marketing campaign relentlessly flogging the imagine of Biden as a “tax mad government robber,” coming to “steal” their hard-earned income.
Whether this is fact or fiction remains to be seen, as Biden has yet to implement his tax plan. But we do have some insights based on his initially proposed plan, along with several concessions the new administration has offered in recent weeks amid congressional budget negotiations.
So, based on what we know thus far, how might Biden’s tax plan impact your finances? Here’s what we’ve uncovered thus far…
2.6% Income Tax Increase On Wealthiest Households
The biggest hullabaloo and most widely covered aspect of Biden’s proposed plan is his desire to raise income taxes for those in the top-tier tax bracket.
The current marginal tax rate for individuals and married couples in the top tax bracket is 37%. Biden proposes raising this rate to 39.6%.
Practically speaking, this would impact single individuals with an annual taxable income over $452,700 and married couples filing jointly with income above $509,300.
Now, to put this in perspective… Tax brackets are progressive. Meaning, only the portion of your income that crosses into a particular tax bracket is taxed at that rate.
For example, if you earned $454,700 as an individual taxpayer, you would only be taxed at 39.6% for $2,000 of your annual income.
Additionally, only about 1.8% of US households earn over $450,000 annually.
In other words, while this proposed increase is getting the most ink and chatter in the media and among political pundits, it’s likely to have the least impact among any of Biden’s potential changes to the current tax code.
Social Security Security Payroll Tax Increase
In addition to raising income taxes on those in the top tax bracket, Biden also wants to add a 12.4% increase on Social Security payroll taxes.
This increase, however, would be split between employers and employees.
Increased Capital Gains Taxes
Currently, long-term capital gains (those held for longer than a year) are taxed between 0 and 20%.
Biden is looking to raise taxes on long-term capital gains and dividends to 39.6% on annual income that rises above $1,000,000.
Eliminate Stepped Up Basis On Inherited Assets
Under current rules, assets passed on to heirs, most notably real estate, can be “stepped up” to their current value and sold without incurring capital gains taxes.
To clarify, when an asset is sold, capital gains taxes are assessed based on the asset’s increase in value. For example, if you purchased a property 20 years ago for $100,000 and sold it now for $1,000,000, your capital gains would be assessed based on the property’s $900,000 increase in value.
But if you died and passed that same property on to an heir, the recipient could “step up” the property’s taxable basis to its current $1,000,000 value. Thereby eliminating any capital gains taxes.
Biden aims to eliminate this loophole, forcing heirs to pay full capital gains on the sale of any inherited assets.
Child + Dependent Care Tax Credit
Biden aims to extend the Child Tax Credit to $3,000 per child for children ages 6 to 17 and $3,600 per child for children under 6.
Additionally, Biden proposes to raise the dependent care tax credit from $3,000 to $16,000 per house. Biden also wants to offer tax credits to those caring for elderly family members and increase tax credits on insurance coverage for long-term assisted care.
Reinstating First-Time Home Buyer Credit
Biden is also looking to revive the First-Time Homebuyers credit, which would offer a tax credit of up to $15,000 to taxpayers purchasing their first home.
Additional Tax Breaks For Middle + Lower-Income Taxpayers
Biden’s plan proposes several measures specifically aimed at lower and middle-income households.
First, Biden wants to institute a retirement savings tax credit to replace the current deduction. The credit would automatically be deposited into retirement funds as a 26% match for every $1 a taxpayer’s contribution.
In other words, if you contribute $2,000 annually into a qualifying retirement fund, the federal government would match 26% of your contribution, depositing a $520 “tax credit” directly into your retirement fund.
Secondly, Biden has suggested establishing workplace “auto-401(k) or IRA” for smaller businesses that don’t offer company-sponsored retirement savings plans.
And finally, Biden is looking to establish a renter’s tax credit for low-income families that earn too much to qualify for Section-8 housing assistance but are still struggling to cover soaring housing costs.
For those who qualify, this tax credit would offset housing and utility costs, so that these expenses would account for no more than 30% of the taxpayer’s gross income.
Where Do You Land in Biden’s Proposed Tax Plan?
Every new administration that rolls into the Oval Office take a crack at revamping the tax code. The resulting rate of success is usually a matter of perspective and typically depends are your financial position.
But regardless, there is always a lot to unravel. And if you’re confused about or have questions on any aspect of President Biden’s proposed tax plan, I encourage you to get in touch for a FREE consultation!