Biden Tax Changes and The Impact on Your Taxes

When any new president starts their term, most business owners ask themselves the same question: “Will my taxes change?” Biden tax changes include a proposed series of tax reforms that, over the next 10 years, would raise taxes on corporations and individuals earning more than $400,000 and lower taxes for lower-income taxpayers. While these changes won’t affect your 2020 tax returns, they could very well impact your 2021 taxes. If you’re curious about what Biden’s proposed tax plans will mean for you, read on for a summary. Then, contact 4Corner Business Services to start tax planning – the earlier you anticipate these changes, the better prepared you’ll be to maximize your returns come 2021 tax season.

Biden’s Proposed Tax Increases 

Tax Rate On Ordinary Income

CURRENT TAX LAW:

We use a progressive tax system, which requires us to pay higher taxes as our income increases. Our tax system has 7 brackets to determine individuals’ and corporations’ tax rate. In 2017, Trump passed the Tax Cuts and Jobs Act (TCJA), which reduced the highest tax bracket rate from 39.6% to 37%. This changed our taxes to the following rates:

• 10%
• 12%
• 22%
• 24%
• 32%
• 35%
• 37% (previously 39.6% before TCJA passed)

‍BIDEN’S TAX PLAN: 

Biden plans on restoring the percentage for the top rate. This would change the tax rate from 37% back to 39.6%.

DOES THIS APPLY TO ME?  

Single taxpayers earning more than $520,000 and married taxpayers earning over $620,000 will be affected.

Tax On Long-Term Capital Gains & Qualified Dividends 

CURRENT TAX LAW: 

Long-term capital gains (defined as assets held for over a year) and qualified dividends are taxed at 20%. However, most Americans pay 15%, and some Americans in the 10% and 12% brackets pay 0%.

BIDEN’S TAX PLAN: 

Biden plans to increase the top rate on these assets from 20% to 39.6%, but ONLY for taxpayers earning more than $1 million.

DOES THIS APPLY TO ME? 

Only if you make more than $1 million annually. If not, you don’t need to worry about this change.

Payroll Taxes

CURRENT TAX LAW:

All taxpayers (including those who are self-employed) pay payroll taxes. These taxes are split between Social Security and Medicare tax:

Employers and employees:

• Split the 12.4% tax on earnings up to $137,700, which is the 2020 Social Security wage base
• Split a 2.9% Medicare tax

Self-employed individuals:

• Must pay the full 15.3%
• Can deduct half of the taxes on your return

Single earners who earn over $200,000 ($250,000 if married) pay an additional 0.9% payroll tax.

BIDEN’S TAX PLAN:

Biden would lift the cap on the Social Security payroll tax, but only for wages over $400,000. For example, an employee earning $500,000 would pay:

• 6.2% tax on the first $137,700
• No Social Security tax on the wages from $137,700 to $400,000
• Another 6.2% Social Security tax on wages over $400,000

DOES THIS APPLY TO ME?

This only applies to wages over $400,000.

Qualified Business Income (QBI) Deduction

CURRENT TAX LAW:

In 2017, the TCJA allowed businesses classified as an S corporation, partnership, or sole proprietorship to deduct 20% of the qualified income earned in the business. This reduced the top tax rate on this type of income from 37% to 29.65%.

BIDEN’S TAX PLAN:

Biden plans to remove this deduction for taxpayers earning over $400,000.

DOES THIS APPLY TO ME?

This applies to you if you own an S Corporation, partnership, or sole proprietorship that earns over $400,000 in taxable income.

Itemized Deductions

CURRENT TAX LAW:

Taxpayers can deduct the either sum of itemized deductions or deduct the standard deduction (whichever is greater). The TCJA increased the standard deduction as follows:

• For single taxpayers, standard deductions increased from $6,350 to $12,400
• For married couples, standard deductions increased from $12,700 to $24,800

The TCJA also decreased the number of taxpayers who can itemize deductions from 30% to 11%, and removed limitations on taxpayer’s itemized deductions.

BIDEN’S TAX PLAN:

Biden plans on reintroducing the Pease limitation, which reduces a taxpayer’s total itemized deduction by 3% for every dollar of income that exceeds $400,000. He also plans to cap itemized deductions at a 28% rate, but only on income that exceeds $400,000.

DOES THIS APPLY TO ME?

If you make over $400,000, your total itemized deductions will be capped.

Corporate Tax

CURRENT LAW:

The TCJA reduced the corporate tax rate from 35% to 21%.

BIDEN’S TAX PLAN:

Biden plans on raising the corporate tax rate to 28%. He also plans on requiring corporations with financial statement income over $100 million to pay a tax of at least 15% on their financial statement income.

WILL THIS APPLY TO ME?

This change will only apply to corporations reporting financial statement income over $100 million.

Estate Tax

CURRENT LAW:

Upon death, total assets worth over $11.58 million are taxed at a 40% rate. Additionally, the value of the assets may be taxed, but appreciation of the assets isn’t taxed when they pass to a beneficiary.

BIDEN’S PLAN:

Biden’s plans include dropping the estate tax redemption to $3.5 million and increasing the rate to 45%. In addition, any appreciation of assets would be taxed upon death.

WILL THIS APPLY TO ME?

If your estate is worth over $3.5 million, this change would affect your estate planning.

Biden’s Proposed Tax Cuts 

Biden has also proposed several tax cuts in the form of tax credits. Tax credits are refundable, which means even if you don’t owe taxes, the credit can increase the size of your refund. Biden has proposed the following tax credits:

• Expanded Child Tax Credit: Current tax credit tops out at $2,000 and only half that amount is refundable. Biden’s plan could increase credits to a maximum of $3,600 per child and credits would be fully refundable.
• Expanded Child and Dependent Care Credit: Biden plans on increasing this credit from $3,000 to a maximum of $8,000 (or $16,000 per family). Half of the credit would be refundable.
• Caregivers of Elderly Relatives: Biden plans to create a new, $5,000 credit.
• First-Time Homebuyers: Individuals could receive a new credit up to $15,000
• State Sponsored Health Plan Credit: Biden plans to expand existing tax credits to make these health plans more affordable.
• Renter’s Credit: This credit would reduce rent and utilities to 30% of income
• Older taxpayers: Biden plans to expand income credit for this age group

2021 Tax Changes: The Bottom Line 

Biden’s proposed credits mean that if his plan is carried through, most Americans would experience a decrease in taxes. Since Biden’s presidency is just beginning, only time will tell how many of Biden’s proposed tax changes will make it into law and what their final form will be. No matter how the tax laws change in the coming years, be sure you’re prepared. With 4Corner’s expert tax services, we’ll stay up-to-date on the latest tax changes and offer financial advice year-round to help you maximize your after-tax income. Contact us today to learn more about how we can support you or your small business through the tax changes to come!