Everything You Need To Know About Biden’s Tax Plan
As part of his campaign, President-Elect Biden has promised some significant economic reforms. For example, he’s pledged to reduce student debt. He also committed to revising the tax code, emphasizing the importance of those earning more than $400,000 per year paying a little more. While a gridlocked Congress and a Senate that may still be in the other party’s hands may stall Biden’s ambitions, here’s everything you need to know about what he’s pledged on the campaign trail concerning your taxes.
No New Taxes for Those Earning Less Than $400k
Biden has repeatedly assured the American public that anyone earning less than $400k per year will not see their taxes rise. For people earning above this threshold, the President-Elect aims at increasing the tax rate from 37% to 39.6% again. As a reminder, the top tax bracket right now starts at all income over $518,400 for single filers and $622,050 if married, filing jointly.
People earning over $400,000 per year would see additional payroll taxes (Social Security and Medicare). He wants to leave the current Social Security limit of $142,800 in 2021 but ask that earnings above $400,000 also be subject to this payroll tax. So, in effect, taxpayers would pay 6.2% on all earnings up to $142,800, 0% on earnings between $142,801 and $400,000, and 6.2% on all earnings $400,001+.
The idea behind both these moves is to increase general tax revenue and help prop up Social Security, which will start experiencing shortfalls in 2021.
He’ll Increase Popular Tax Deductions
Biden has also said that he would expand some popular tax deductions for those earning less than $400,000. Of particular note to many families is that he wants to boost the Child and Dependent Care Tax Credit. The credit would increase from $3,000 to $8,000, with a cap at $16,000 total. He would also make the Child Tax Credit fully refundable. It would rise from $2,000 to $3,000 for children ages 6 through 17. For younger children, this credit would be $3,600.
It’s impossible to overstate how significant the move is to make the tax credit fully refundable. With the previous credit system, it reduced your tax bill. Therefore, if the child credit were $2,000, you’d need to owe at least $2,000 in taxes to get the maximum benefit. If you owe $0 in taxes, you will get none of that credit. Now, if you owe $0 in taxes, you’d get a refund of $2,000.
Although small, this change will likely get the tax credit into the hands of people who perhaps need it the most.
There are other credits that Biden has proposed, including tax adjustments to cap health insurance costs at 8.5% of income and expanding the first-time homebuyer’s credit.
Retirement Benefits Could Change
Biden has expressed a desire to reform 401(k) contributions and equalize the benefits of contributing across all income levels. Right now, the benefits of 401(k) contributions increase as income levels rise. It acts as an income level reduction, so if you earn $100,000 per year and contribute $10,000, the tax you pay will be like you made $90,000 per year. In other words, it’ll reduce the taxes you pay at your highest tax bracket, which means that the higher your income is, the more of a benefit contributing to your 401(k) will be.
Biden has not specifically said how he would change the 401(k) rules, just that he wants the contribution benefits to be more equitable. These 401(k) adjustments could, hypothetically, affect people earning less than $400k by reducing the tax advantage of people’s contributions. Whether or not that happens remains to be seen, but there is a possibility.
Biden Has Said He’d Adjust Some Key Taxes for the Wealthy
The estate tax exemption currently sits at $11.58 million. Estates below this figure pay no estate tax upon death, whereas those above that mark must pay. Biden wants to slash this threshold in half and make people pay taxes on all estates above $5 million. This level is the way it was until relatively recently.
Although this idea was popular on the campaign trail, most people who hit this threshold already use relatively sophisticated tax planning strategies (for example, irrevocable trusts can bypass estate taxes almost entirely). As such, the effect that this will have on the United States government revenue is unclear.
Furthermore, individuals with incomes over $1 million will have to pay the same tax rate on investment income as they would on conventional wage income. The generally preferential tax treatment of investment income would remain for those in the lower-income levels.
Will My Taxes Go Up?
Ultimately, the question that everyone wants to know is, “will the Biden Presidency increase my taxes?” As is often the case with politics, the answer to that question depends on quite a few factors.
First, if you have income over $400,000 per year (and especially if you have income over $1 million), the answer is yes. Biden’s tax plan will increase the amount of money you pay. Biden has stated his desire for this on the campaign trail, and the tax plan that he has put forth is consistent with this goal.
For those earning less than $400,000 per year, the question becomes a little trickier. For the most part, the answer is no. Your taxes will not rise. You’ll pay the same amount of money as you were paying under the previous administration. However, there are some aspects of Biden’s tax plan that could cause you to pay a little more, even if his list of changes does not explicitly refer to these increases as a “tax.”
According to the Tax Foundation, Biden’s plan “would lead to about 7.7 percent less after-tax income for the top 1 percent of taxpayers and about a 1.9 percent decline in after-tax income for all taxpayers on average.”
Given how divided Congress and the Senate are, we’ll see how much Biden can affect tax rates. One thing, though, is sure: we’ll be heading in a much different direction, tax-wise, than the past four years.