Joe Biden ran on a number of proposed tax law changes during the 2020 campaign. Several of these proposals temporarily took effect as part of the American Rescue Plan, and several others have been introduced in Congress. Note that, historically, major tax reforms seem to pass towards the end of the year, with changes applying to the following year. In this episode, I’ll summarize some of the proposed changes.
Also, Money Checkup will be taking a hiatus after this episode. This summer I’m focusing on renovating our home and working on a lifelong dream of mine: Publishing a children’s book. I’ll be blogging about our renovation all summer, so if you’re interested in following along, sign up for my newsletter here.
- Biden has promised not to increase taxes on families earning less than $400,000 per year.
- Right now, the top tax bracket is 37%. Biden has proposed increasing the top tax bracket to 39.6%, which was the case prior to 2018. It is unclear whether that would apply to single or joint filers. If the top bracket does return in 2022, you may want to work your CPA to see if you should accelerate income.
- Right now, if a couple earns more than $426,000 per year, the QBI (Qualified Business Income) deduction is phased out for specified service trades or businesses (SSTBs), a category that can include physicians, accountants, and lawyers. Biden has proposed removing the QBI for all business owners with incomes above $400,000, not just SSTBs.
- The biggest change we may see is reverting back to the itemized deduction limitation, which essentially maxes out the benefit at 28%. In other words, if your tax bracket is higher than 28% you’ll only get up to 28% tax deduction
- The proposed Retirement Account Flat Credit would replace the dollar-for-dollar deduction for pre-tax retirement plan contributions with a flat credit of 26%. In general, that means high earners will not quite get a full offset for the pre-tax deduction, then have to pay tax again upon withdrawal. (Note that this proposal does not apply to Roth accounts, since Roth accounts are funded with post-tax dollars.)
- The Child Tax Credit was already passed as part of the American Rescue Plan. Credits of $3,600 for children under 6 and $3,000 for children over 6 are refundable for 2021. Note that these credits are subject to phaseouts for couples earning more than $150,000.
- The American Rescue Act also temporarily increased dependent care assistance tax credits, from 35% to 50% of eligible expenses to 50%, and increased allowed contributions to dependent care FSAs.
- A $5,000 caregiver credit has been proposed.
- A first time homebuyer credit has been introduced in the House of Representatives. This credit would only be available to people earning up to 160% of area median income and whose homes are up to 110% of the area median purchase price. But it would allow a tax credit worth up to 10% of the purchase price, capped at $15,000.
- If Biden’s proposed changes take effect, long-term capital gains exceeding $1 million would be taxed at ordinary income tax rates. If you have a business or other transaction that will trigger a large capital gain, work with your CPA or advisor to see if you should accelerate those events this year
- For taxpayers earning more than $400,000, 1031 exchanges would no longer be allowed.
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