The Tax Cuts and Jobs Act (TCJA) passed under former President Trump is close to being repealed and President Biden has proposed a new tax plan. This plan will likely pass since Democrats control the House and Senate.
Biden’s proposal could bring about several changes in tax law, but what does this mean for you? This post will highlight some of those changes and outline potential outcomes.
Individual & Corporate Tax Rates
The biggest change for individual tax rates is the increase in the top marginal tax bracket from 37% to a proposed 39.6%. The 39.6% rate is likely to only affect those individuals earning more than $400,000 annually.
The corporate tax rate under Biden would increase from 21% to 28%. In addition, Biden has proposed a 15% alternative minimum tax (AMT) on book profits of $100 million or greater.
Long-Term Capital Gains
Currently, qualified dividends or long-term capital gains (assets held over one year) qualify for special tax treatment that range from 0%-20% depending on an individual’s income in a particular year. Biden’s plan proposes that taxpayers who earn more than $1 million per year should be paying taxes in the top bracket at ordinary income rates. (As mentioned earlier, the new rate will be 39.6% at the federal level.) For most Americans, this legislation will not affect their current situation. However, many fear that this is a small step toward eliminating long-term capital gains altogether.
Step-Up in Basis Rule
Another proposal in Biden’s plan is to eliminate the Step-Up in Cost Basis Rule that pertains to inherited assets. The Step-Up in Basis Rule allows you to increase or “step-up” the cost basis on an asset to the fair market value at the original owner’s death. According to Consumerfinance.gov, 82 percent of Americans over age 65 own their own homes. This is the highest rate of homeownership for any age group.” This change allows the government to collect more revenue from capital gains taxes on appreciated property (real estate, stocks, etc.).
Under current law, the Social Security payroll tax is 6.2% for an employee and for an employer (12.4% total) on income up to the contribution base of $142,800. Biden’s plan looks to bring back this tax for higher income earners. He is proposing the same 6.2% from the employee and employer (12.4% total) on all income earned over $400,000. In this instance, wages between $142,800 and $400,000 would not be subject to Social Security payroll taxes.
Estate tax rates, exclusions, and thresholds have constantly changed over the years. Currently, estates valued under $11.7 million per individual are excluded from the 40% estate tax upon the owners passing. Biden’s plan proposes that this threshold decreases to $3.5 million and that the estate tax rate increases from 40% to 45%. Americans with estates valued at over $3.5 million will need to reevaluate their estate strategy to potentially avoid the 45% tax.
Student Loan Forgiveness
On Biden’s first day as President, he extended a pause on payments for federal student debt. While Biden was running for president, he was in favor of forgiving $10,000 in student loans per individual. Now Democratic Senators are asking for him to increase that amount to $50,000 through executive action. According to the U.S. Department of Education, updated figures indicate that forgiving $50,000 of student debt per borrower would eliminate nearly 84% of all borrowers’ college debt.
First-Time Homebuyer Credit
During his administration, former President Obama incentivized Americans to purchase homes by offering a $7,500 credit in 2008 and an $8,000 credit from 2009-2010 for first-time homebuyers. In 2021, President Biden is looking to reinstitute a first-time homebuyer’s credit of $15,000. This could be a huge catalyst for the (already hot) housing market. According to Moody’s Analytics in this Housing Wire article, “Renter households are estimated to save only 2.4% of their income each year… At that rate it would take a typical renter about 14 years to save $15,000.” This credit could make millions of Americans eligible to purchase a home, which could ultimately drive housing prices even higher.
Though this would create opportunities for many Americans to enter the housing market, Lawrence Yun, a chief economist at the National Association of Realtors argues that a credit won’t help unless there’s a supply change. Yun mentioned, “Only with added supply will the homebuyer tax credit be effective in boosting homeownership and enlarging the middle class. Without supply, home prices jump much higher with no meaningful gain to new homeownership.”
While tax changes are on the horizon, the specifics are still being solidified. It’s important to track these changes to see how they could affect your personal financial picture. If you have any questions, please reach out to our team here at Taylor Hoffman!
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Taylor Hoffman is not a law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their attorney for more specifics.