Many Americans want to know how our future president’s tax plan will affect them.
Biden’s tax plan will affect wealthier Americans, corporations, and everyday individual taxpayers. He also plans on making significant tax revisions on Trump’s previous tax plan which took place in 2017.
Skip the tax jargon by taking a look at this quick breakdown.
Key Changes
Here are the major findings in Biden’s tax plan.
- Individuals earning more than $400K will be subject to higher taxes
- The top tax bracket will revert back to 39.6%
- Higher tax brackets face limitations on itemized deductions
- The Child and Dependent Care credits increase
- The First Time Home Buyer credit is re-established
- The estate tax exemption is reduced
- The step-up basis for capital gains is eliminated
- Corporation taxes increase
Americans who earn over $400,000
Biden’s tax plan consists of raising taxes for those who are in the higher tax bracket. He also plans to revert the top tax brackets to 39.6% from the previous 37%; previously established with Trump’s Tax Cuts and Jobs Act in 2017.
That being said, if you earn more than $400K, be prepared for a raise in payroll taxes. Old-age, survivors and disability insurance (social security) holders are also affected. There consists of a 12.4% payroll tax on earned income exceeding $400K. This applies to employers and employees.
Come tax time, those who earn over $400K (tax rates higher than 28%) will face limited itemized deductions; restoring the previous Pease limitation.
Child & Dependent Care Benefits
Biden’s tax plan also aims to assist taxpayers with children. The Earned Income Credit (EIC) will extend to childless workers over 65 as well as renewable-energy-related tax credits. He also plans on increasing the Child Dependent Care Credit to a maximum of $8,000 in qualified expenses ($16,000 for multiple dependents); an increase in comparison to $3K for the previous year.
Additionally, the Child Tax Credit (CTC) would be fully refundable. It increases to $3,000 for children under 17 and will have a $600 bonus credit for children under 6.
First Time Homebuyers
The good news for new homeowners is Biden’s plan on reinstating First Time Homebuyer’s Credit. That being said, he wants to grant $15K for first time homebuyers.
Although he hasn’t mentioned specific details on rent forgiveness or loan forgiveness, he tax plan.
Estate & Capital Gains
With Biden’s tax plan, those with long-term capital gains and qualified dividends at the tax rate of 39.6% face higher taxes. However, it applies to income exceeding $1 million.
He is also planning to expand the estate and gift tax by restoring the rate and exemption to the previous 2009 levels. This means reducing the exemption amount to $3.5 million and increasing the top rate for the estate tax to 45%.
Additionally, he plans on eliminating a step-up in basis which reduces capital gain taxes. As a reminder, a step-up basis occurs when someone inherits an asset after the death of the owner. The cost of the asset is valued at the amount at time of the owner’s death which will give you a new basis. This ultimately saves you on capital gains tax.
Here’s how the step-up basis and capital gains tax works.
If you buy a property in 1990 for $100K, your basis is $100K. If you sell it now for $1M, your basis (original price) will be $100K and your sales price will be $1M. The capital gains tax will be on the difference; $900K. The IRS will tax you on that $900K.
The step-up allows you to increase the $100K basis value. When someone dies, their asset is reappraised on their date of death. If the property is worth $800K, your basis (original price) $100K is increased to new basis of $800K. You step up to a higher level.
For example, the family member who inherits the property will be able to work with $800K. If they sell the property worth $1M, their capital gain is the difference of the original basis of $1M and the step-up basis of $800K which is 200K. They will only pay a capital gain tax on $200K. Without this, they would pay the gains tax on the $1M – $100K purchase price.
With the elimination of the step-up basis, you will inherit the property for the original price of the property. If you decide to sell you will pay taxes on the difference between the original purchase price and what it sells for today.
Business taxes
Business owners should prepare for what’s to come with Biden’s tax plan. The qualified business income deduction (QBI) phases out for filers with taxable income over $400K. Small businesses will also receive tax credits for adopting workplace retirement savings plans.
For businesses who experience workforce layoffs or a major government insitutional closure, Biden plans on introducing a Manufacturing Communities Tax Credit. This credit will aim to reduce the tax liability of these businesses.
Corporations
Corporations will be looking at a raise in taxes; from 21% to 28%. A minimum tax will apply to corporations who earn more than $100 million. This is similar to the AMT in which they pay the greater of the regular corporate income tax or 15% of the minimum tax.
Global intangible low-taxed income
For income earned by foreign affiliates of US companies, there is a new minimum tax. This income is Global Intangible Low Tax Income (GILTI). The tax rate increases from 10.5% to 21%. The exemption is also gone for returns under 10 percent of qualified business asset investment.
Investors
Biden introduces the New Markets Tax Credit and makes it permanent.
This credit helps low-income communities by providing an incentive for investors. The US Department of Treasury allocates tax credits to intermediaries for investment projects. This credit will go against their federal income tax.
Keep an eye out for more updated information on Joe Biden’s tax plan
Keep in mind that these tax plans are not yet set in stone. Congress must first review, deny or pass the changes to Biden’s tax agenda.
As a reminder, a new tax season is approaching shortly. For more information on the 2021 tax season, check out our blog on preparing for the 2020 tax year by clicking here.
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