Since taking office in January, President Biden has taken decisive action on some of the most critical challenges facing the American economy in the wake of the COVID-19 pandemic. Biden’s proposals—some already enacted into law—make some important changes to tax law that could both significantly reduce or increase your federal tax obligation. While many of these changes are temporary and aimed at helping the country rebound from the 2020 economic dip, others would be more permanent and will likely affect your estate and tax planning strategy.
Let’s look at Biden’s plan, what’s been done so far, and what’s planned for the future.
Biden’s Tax Plans: The American Rescue Plan (enacted)
Signed into law by President Biden on March 11, 2021, the American Rescue Plan Act provides both emergency cash assistance to citizens struggling in the wake of the COVID-19 crisis and individual tax changes aimed at benefitting lower-income individuals and households.
Here’s a quick review of the plan’s tax changes…
- The child tax credit has increased to $3600 per child under age 6, and $3000 per child between the ages of 6–17.
- The child and dependent care credit for individuals have been raised to $4000 and $8000 for two or more qualifying individuals.
- The earned income credit was extended to include individuals under 25 years of age and removes the maximum age limit for eligibility.
- Premium reductions for the Affordable Care Act have been extended by two years.
Biden’s Tax Plans: The American Jobs Plan (proposed)
The second in Biden’s three-part plan would entail a significant increase in federal taxes on corporate profits. Much of the money raised by this segment of the Biden plan is slated to go toward improving America’s aging infrastructure network, including highways, bridges, and railways. This infusion of cash will go toward meeting the estimated $2.3 trillion in infrastructure improvement costs. The new tax changes under this portion of the plan include both higher corporate taxes and new minimum tax rates on book income and profits from multinational corporations.
Biden’s Tax Plans: The American Family Plan (proposed)
The third segment of the Biden plan includes substantial tax increases for the wealthiest Americans, including an increase in the capital gains tax (tax on profits made through the sale of stocks, real estate holdings, and other securities).
The money raised by the capital gains tax increase would help pay for the plan’s programs, which include:
- Providing American children with an additional 4 years of free education
- Offering two years of free pre-kindergarten for 3- and 4-year-olds.
- Providing two years of free community college.
- Expanding child care subsidies.
The plan would also assist colleges and universities serving minority groups and would help to support paid medical and family leave and nutrition programs.
How Biden’s Tax Plan Affects You
While much of the Biden plan is still being discussed in Congress, there are some key takeaways that give us a clearer picture of the plan’s effects. Here are a few key points of the proposed plans to remember…
- The top individual tax rate will increase from 37% to 39.6%
- Individuals earning <$400k annually will not see an increase in their federal tax obligation. Small business owners earning over $400,000 may also see a tax hike by losing a valuable deduction.
- The corporate tax rate will rise from 21% to 28%
- American corporations’ foreign income would be subject to a 21% tax rate
- Individuals with incomes over $1 million would be subject to a capital gains tax rate of 43.4%
- The fully refundable child tax credit has increased temporarily from $2000 to $3600 per year.
- Changes to the inheritance tax law will close a longstanding loophole that has allowed wealthy taxpayers to make use of a “step-up” that greatly reduces their tax obligation. This “step-up” would be eliminated under the Biden plan, significantly increasing the tax obligation of those who inherit large sums.
- The value of itemized deductions has been capped at 28%. Generally, the plan is to reduce the total amount of itemized deductions for anyone paying a marginal tax rate above 28% – e.g., taxpayers in the current 32%, 35%, and 37% tax brackets, or the proposed 39.6% bracket.
Getting the Most from Your Return
Nobody wants to pay more tax than necessary, and you’ll likely want to take advantage of the tax breaks that apply to you. But why go it alone? Without expert guidance, navigating the new tax laws can be daunting. That’s why we at Moskowitz LLP employ only skilled tax accountants, tax attorneys, and consultants—to keep your tax obligations optimized, to provide you with sound tax planning advice, and to ensure that your returns are complete.
Concerned about changes to the capital gains tax? We can help. At Moskowitz LLP, we provide each client with professional tax guidance that can save you money, and keep you out of trouble with the IRS.
Contact us today, and let us take those tax hassles off your hands.