Biden’s tax plan has received a lot of press. Below are some key elements in Biden’s Proposed Tax Changes coming in 2021.
- Top Tax Bracket Increase– Biden says anyone making under 400K will not be impacted. If you’re above 400K however, he wants the top tax bracket to increase from the current 37% to a minimum of 39.6%. There’s been some talk of that percentage being potentially higher as well.
- Elimination of Step–Up in Basis at Death– A long standing exception for capital gains at death may be impacted by Biden’s tax plan. If you inherited an asset that had capital gains, you essentially got basis valued at death. This means if the decedent bought something for $1 (and never sold it) and then at death the value was $1,000,000, there would be $999,999 imbedded long-term capital gains. However, if you inherited those funds and sold them the next day, your basis would be $1,000,000 and thus no taxes owed.
- Increase Payroll Taxes– Today, you pay Social Security tax on your first $137,700 of income at 6.2%. Your employer also pays the same 6.2% on that income. For everything above that threshold, there’s no more SS tax paid. However, Biden’s proposal would change that 6.2% for both employee and employer again on income over $400,000. Thus, you would pay SS tax on your first $137,700 and again on all income of $400,000 and over.
- Capital Gains Tax– The Biden plan want to tax your long-term capital gains at ordinary income tax rates if you are over the million dollar income threshold. Currently for that income, it’s at 20% plus 3.8% Medicare tax. This effectively increases the tax owed on those dollars to 39.6% from 23.8%.
- Cap Tax Benefits for Itemized Deductions to 28%- Staying consistent, President Biden would like to cap one’s itemized deductions to 28% of value on those earning $400,000 or over. Essentially, this limits the high-income earners tax benefits for itemized deduction to just 28%, rather than the full amount.
- Repeal of Estate Tax Threshold- Today, each of us gets a very favorable $11.58 million in estate tax exemption, meaning we can all pass that much of assets to a non-spousal individual without incurring any Federal estate tax. The proposal would go back to the pre-Trump plan, cutting the figure in half to roughly $5.8 million per person.
- Temporarily Increase the Child and Dependent Care Credit- The current tax credit is $3,000 and the proposal would increase this threshold (for the time being) to $8,000 per child. It’s a nice little benefit and one of the things aimed to reduce taxes for the below $400,000 earners. Additionally, there are talks of temporarily increasing the Child Tax Credit (not to be confused with the former). The proposal increases it from $2,000 to $3,000 for children who are 17 or younger and gives an additional $600 bonus credit if you have children under 6.
- First Time Home Buyers Tax Credit- Biden also wants to reinstate the first-time home buyers credit up to $15,000. Certainly, it’s an incentive to buy that first home. Buying your first home? Check out our home buying calculators.