Any transition is a time of uncertainty, but moving into the New Year and the shift from Trump to Biden raises additional concerns for many investors. In particular, the nature of Joe Biden’s tax plan and the role it will play in the lives of those planning for their financial futures is a big question. How will Biden’s plan contrast with four years of Trump? How will it affect our ongoing economic recovery? What will it mean for the taxpayer?
These are valid questions with any new administration, but especially so after four years of the current administration and the unprecedented events of 2020. To help you plan your financial moves in the coming year, here are some insights into Joe Biden’s tax plan and what it may–and may not–do.
Biden’s Tax Plan Makes Some Key Changes
There are a number of important changes planned under the Biden administration, which may reshape some parts of the tax code. These include the following:
In its current form, Biden’s tax plan would increase tax revenue by $3.3 trillion over the next ten years, thus collecting roughly $2.8 trillion in total revenue when all macroeconomic impacts have been accounted for. This is lower than many initial estimates and would have the long-term net effect of reducing the GDP by 1.62% over the long term.
Biden’s tax plan alters some existing tax options for the higher-earning taxpayers might be better–in this case meaning those who make above $400,000 a year. These changes include alterations to the 2017 Tax Cuts and Jobs Act, moving the tax rate for higher-earning taxpayers from 37% to 39.6%.
Under Biden’s tax plan, itemized deductions would be limited. This would include state and local taxes, medical expenses, mortgage interest, and other deductions. The cap would be set at 28% for high-income taxpayers.
There are some changes coming to capital gains taxes as well: under Joe Biden’s tax plan capital gains would be taxed at the same rate as household income in both the short- and long-term. Currently, the long-term rate is lower, topping out at 23.8%.
Biden’s tax plan would also expand the Earned Income Tax Credit for some earners over the age of 65.
The new tax plan would also raise the Child and Dependent Care Tax Credit (CDCTC) from its current maximum of $3,000 of qualified expenses to $8,000 (or $16,000 for multiple dependents). Biden’s tax plan would also increase the maximum reimbursement rate from 35% to 50%.
Some Obama-era tax credits would reappear, including the first-time homebuyer tax credit which would allow first-time homebuyers to claim tax credits of up to $15,000.
What Does Joe Biden’s Tax Plan Mean For You?
The impact of Biden’s tax plan on the individual will greatly depend on both your income and your current financial planning model. On the surface, Biden’s tax plan is clearly designed to benefit and protect lower and middle-income earners, opening and reopening options for deductions and credits with the intent of increasing their earned income. On the other hand, details are where the devil lives. As the Biden tax plan unfolds, it is likely to see direct and indirect tax increases on taxpayers who earn less than $400,000. In other words, the middle class may not be totally clear of the crosshairs. For higher-level earners, it’s a bit of a different story. Biden’s tax plan does potentially mean an increase in taxes paid by the higher-earning taxpayers, but it also opens some new opportunities if navigated carefully. A great deal depends on Congress and what form the final tax bill or bills take. It’s likely that Biden’s tax plan will not come as a single piece of legislation but will move through the House and the Senate in pieces. This will necessitate careful planning on the part of investors and financial advisors nationwide.
Transitions are uncertain times, presenting both opportunities and blind spots. Now more than ever the right financial guidance and advice are critical for your success no matter what your plans. At OmniStar Financial, we’re here for you. Contact us today and we’ll help you make the right plans for our future.