As election season comes to an end, it’s a good time for us to look at what President-Elect Joe Biden’s tax proposals mean for Americans. We’ll stick to the facts and keep our opinions out of it!
There’s been a lot of talk surrounding Biden’s plan to raise taxes on the “wealthy”. Regardless of your definition of that term, he’s repeatedly said that he won’t raise taxes for anyone making less than $400,00 per year – but naturally, it’s a bit more complicated than that.
The $400,000 threshold would apply to income taxes and certain payroll taxes. Some of Biden’s changes would raise other taxes, however – even on those making under $400,000 per year. Further, some of the proposed tax increases for businesses could pass through to the individual owners, further impacting those making below $400,000 per year.
It’s important to remember: the decision to raise or lower taxes cannot be made by the president alone. Congress must pass legislation to adjust tax policy, and then send the bill to the president to sign off on. At the time of this writing, the balance of power in the Senate is still undecided. If Republicans maintain control of the Senate, Biden will have a difficult time enacting many of his proposals into law. If the runoffs in Georgia go the other way, he would have an easier path getting new legislation enacted. There’s also COVID-19 – still the principal issue at hand. If the economy continues to be a bit fragile in the coming months, he could hold off on any attempts to enact tax increases.
But enough of the intro. Let’s get down to what’s important: How would Biden’s tax proposals impact YOU? As you might have guessed, that depends…
Are you an average lower-to-middle class American?
Biden’s overall tax plan includes proposals to cut taxes for low- and middle-income Americans. His plan lays out proposals to expand the child and dependent care credit, increase the child tax credit, and exclude forgiven student loan debt from taxation. He wants to repeal portions of President Trump’s Tax Cuts and Jobs Act (TCJA) that benefited the wealthy, but keep the TCJA provisions that helped lower and middle class families.
It’s important to note that these families still could take an indirect hit from some of Biden’s proposals. For example, if Biden raises the corporate tax rate from 21% to 28%, imposes a 15% minimum tax on large corporations, and removes certain corporate tax breaks, these tax increases on businesses could indirectly result in tax increases (or wage cuts) for low- and middle-income families.
The American Enterprise Institution found that most of the tax revenue under Biden’s tax proposals would come from people in the top 1% income group. However, they concluded that by 2030, the “bottom 99% of taxpayers would also face modest tax increases” attributable to the business tax increases. Experts predict that the bottom ~80% of taxpayers will still see a tax increase – ranging from 0.2% to 0.6% of after-tax income – under Biden’s proposals.
Do you earn at least $400,000?
Biden has several tax proposals that mean less dollars for those making $400,000 or more. Without question, he has openly opined that the bulk of the additional tax revenue should come from this group.
Biden plans to raise the top individual income tax bracket from 37% back to the 39.6% that was in effect under the Obama and Clinton administrations. This would undo a significant part of the tax reductions enacted by President Trump’s Tax Cuts and Jobs Act in 2018. Perhaps a more significant part of the tax cuts under the TCJA was the increase in the threshold where the highest rates kicked in.
In 2020, single and head-of-household filers won’t hit the top rate until they have taxable income over $518,400; joint filers won’t hit it until they reach taxable income of $622,050.
It is still unclear whether or not Biden would try to reduce the threshold for the top-rate down to $400,000. Doing so would increase taxes for single filers making between $400,000 and the current threshold and potentially for married filers making much less.
Biden also has plans to subject wages above $400,000 to the 12.4% Social Security (FICA/Payroll) tax that is paid 50/50 by the employee and employer. In 2020, wages above $137,700 aren’t subject to the tax. Instead of imposing the tax on all wages, Biden only plans to add the Social Security tax to those above $400,000. Therefore, wages between $137,700 (which increases annually for inflation) – $400,000 would continue to exempt from the FICA tax, but this tax would kick back in for wages over $400,000.
Small business owners may see another tax increase under the Biden administration by losing the 20% deduction for “qualified business income” , also enacted in 2018 by the TCJA. He has suggested support for phasing out the QBI deduction for small business owners making more than $400,000 per year.
We’re just trying to hit the high points here, but sure, there are many other pieces of Biden’s tax proposals as well. One in particular to pay attention to is possible changes to estate and gift taxes. Trump’s changes to this in 2018 might have been the largest and most overlooked point in the TCJA. The current threshold of $11.58 million per person allows the vast majority of families to avoid any estate and gift taxes over their lifetimes. Reducing that to the 2009 level of $3.5 million, as Biden has proposed, would greatly alter that. Almost as important is the potential disallowance of the step-up in basis of inherited assets to fair market value. This would certainly subject more people to estate and gift tax AND leave the beneficiaries with potentially large gains that would also be subject to tax when they dispose of those assets.
In the end…
Whether you make more than $400,000 or less than $400,000, we know that there will likely be changes for every American taxpayer. Transition like this can cause anxiety, but it has become a natural part of any change in leadership – particularly when it’s from one party to the other.
That’s where we come in. We’ve seen our share of changes from one Administration to the next. While some may be considered more taxpayer-friendly than others, all changes come with new opportunities. Having an expert on your side allows you to navigate the changes and make sure you aren’t paying more tax than necessary. Schedule a meeting with one of the expert advisors at Culpepper CPA. Let us strategize with you about how to make the most of your earnings in the long run.