What You Need to Know About Biden's Tax Hikes
With any new administration in the White House, we are bound to see changes to our country’s taxes. The Biden Administration has made headlines due to eye-popping tax increase proposals that are working their way through Congress.
So, what has been proposed? And how may it affect you? To answer these questions, we must dig in to the details of Biden’s three-part program that is designed to enact his proposed policy changes.
What are Biden’s Programs and Proposals?
Biden’s first plan has already been enacted. The American Rescue Plan, which was enacted March 11, 2021 is a relief plan that provided cash payments to individuals and also included a number of individual tax-law changes benefitting lower income individuals and families. These changes are all time-limited, and designed to be temporary remedies for problems that were worsened by the pandemic.
The American Jobs Plan, proposed March 31, 2021, is the second part to Biden’s program. If enacted as is, this plan would increase income taxes on corporate profits. This would help to fund the plan’s social infrastructure improvement goals which are estimated to cost $2.3 trillion.
Finally, The American Family Plan, proposed April 28, 2021, is the final step to Biden’s program. The proposal includes plans to increase taxes for wealthy individuals and bring a significantly higher capital gains tax rate.
What are the Numbers Behind Biden’s Proposals?
Let’s look at a few of the key takeaways and the numbers behind these proposals.
- The top individual federal income tax rate would rise from 37% to the pre-Trump rate of 39.6%.
- The corporate tax rate would rise from 21% to 28%. Including a 15% minimum tax that would apply to corporate book income.
- American corporations’ foreign income generally would be subject to a tax of 21%.
- Taxpayers with an income over $1 million would pay a tax of 43.4% on capital gains.
- An extension through 2025 is proposed for the 2021 increase in the fully refundable child tax credit from $2,000 per child to $3,600 for children under age 6 and $3,000 for children ages 6 through 17.
- Extensions beyond 2021 are also proposed for the increase in the maximum Child and Dependent Tax Credit from $3,000 to $8,000.
- The expansion of, and increase in, the earned income tax credit for young workers.
- The continuation of premium tax credits that reduce ACA health insurance premiums.
What’s Included in the Social Infrastructure of the American Families Plan?
The American Families Plan includes a lot of social infrastructure that would benefit low- and middle-income individuals and families. Here’s a sampling of what’s included:
- Free preschool and community college
- More Pell Grants
- Scholarships for future teachers
- Caps on childcare expenses
- Training and pay for childcare workers
- Guaranteed family and medical leave
- Enhanced unemployment benefits
- Tax breaks for lower- and middle-income families
How is the Child Tax Credit Impacted by Biden’s Tax Proposals?
The Child Tax Credit will revert for 2022 to $2,000 per child under age 17 unless extended by legislation. Biden proposes extending the increase in child tax credit through 2025 and make its full refundability and advance payments features permanent.
When Will Biden’s Tax Hikes Become Effective?
The good news for those who don’t like higher taxes is that it takes time for things to move through congress. With that, you shouldn’t expect new taxes to take effect until 2022 at the earliest. Also, if the economy doesn’t fully recover soon, any new tax increase could be pushed even further down the road, as raising taxes in a stalled economy is risky.
Are Biden’s Tax Hikes Inevitable?
Maybe. Maybe not. Even with all of the proposals and a Congress controlled by his party, there are chances Biden won’t get what he wants. The proposed changes could also be cut down from where they started or Congress could also come up with an entirely new tax slate and shelve Biden’s entire plan.
What Should to Prepare for Biden’s Tax Proposals?
First, take a deep breath. Then, make sure you continue to make sound financial decisions. Invest and diversify wisely. And importantly, keep in touch with your financial advising specialist, who can help you plan and mitigate new tax implications on your income.