Every January when people are awaiting the arrival of their W2 and 1099, nerves set in knowing that a portion of your earnings will go to taxes. With Joe Biden becoming the 46th President of the United State, it is not uncommon for people to wonder what we can expect from his administration when it comes to taxes.
Biden will likely be quickly making changes to portions of the 2017 tax act signed by former president Donald Trump. The Tax Cuts and Jobs Act of 2017 made several changes to the tax code that affected American families. This included expansion of the standard deduction and child tax credit, doubling of the estate tax exemption and reform of the alternative minimum tax. It also reduced taxes for the highest earners and corporations, the first areas President Biden is expected to target.
Biden has proposed raising the marginal income tax rate from 37% to 39.6% for Americans who earn more than $400,000. Those who make more than $1 million annually also would pay 39.6% on long-term capital gains and investment incomes under his plan.
Michael Hammelburgerm CEO of The Bottom Line Group said “This will affect their net earnings but make economic equity more visible”.
Biden also intends to change that way that taxpayers contribute to retirement plans, incentivizing lower-earning and middle-class Americans to save for the future. Currently, contributions are considered deductions from overall earnings come tax time instead of credit, and Biden wants to flip that. Lower earners would get a bigger tax break in advance, while they’d shrink for higher earners.
It is said that under Biden’s proposal, every dollar you contribute will not be deductible, but instead, for every dollar you contribute, 26 cents will be deposited into your retirement account as a matching contribution. Money will be taxable when you withdraw the money, benefiting those who invest in traditional IRAs and 401k’s, putting them closer to equity with those who make Roth IRA contributions since credits are always more valuable than deductions.
Biden has proposed that first-time homebuyers would get a $15,000 tax credit. It would be paid as a credit right away for help with a down-payment, rather than waiting until tax returns are filed the following year. First-time homebuyers are considered those who haven’t owned a home in the past three years.
Unfortunately COVID-19 comes into play once again, exacerbating an already short supply of housing inventory. A new group of buyers armed with a tax credit toward a down payment could further increase selling prices, keeping prospective buyers out.
Disabled and Seniors
It is suspected that the disabled and seniors will benefit from the Biden administration. Once again, Biden has proposed increased tax credits for both employers that hire those with disabilities and to family caregivers. Biden supposedly also plans to expand access to Achieving a Better Life Experience (ABLE) accounts, which provide tax-advantaged saving accounts for people with disabilities to help pay for some expenses.
Finally, Biden plans to increase tax benefits for elerdly Americans who pay for long-term care insurance with their retirement savings. He wants to allow low-wage workers over age 65 to claim their earned income tax credit, where currently you can’t claim it if you’re over 65.
This post is meant to take a non-partisan, educational approach to the Biden tax plan, so that people are able to gauge a better understanding of what is to be expected. If you are feeling nervous about tax-season, we have professionals here at Penny Lane Financial who can help you come up with a tax plan that works for you.