President Biden has proposed a blueprint for a tax policy built upon the outline he made known during his campaign. The core of Biden’s tax plan incorporates increasing taxes on wealthier households and corporations while reducing the tax burden with credits for lower to moderate-income families. Currently, there is Democratic control of Congress, so it is increasingly likely that the proposed changes will become an actuality. In precisely what anatomy, at what time, and to what degree is still in question; however, a change in the tax laws is a reasonable expectation.
For American taxpayers, it is understandable to have some questions and concerns regarding these proposed changes. While it may be early to make recommendations, it is essential to examine these potential future tax law changes so you can speak to your fiduciary financial advisor about how to position yourself for planning opportunities when these changes arrive.
Here are some questions to ask yourself regarding some of the main areas of tax law that Biden’s tax plan could affect.
Do You Have a Child Under 18 Years of Age?
Biden proposed to expand the child tax credit in his plan, and it was temporarily accomplished recently under the American Rescue Plan Act of 2021. The regular rules are still applicable for this tax credit, but they now include children under h18. You may qualify for the Child Tax Credit of $2,000 in 2021 for each qualifying child subject to reductions and phasing out if your Modified Adjusted Gross Income (MAGI) is above $200,000 for those single filers or $400,000 if you are married and filing jointly (MFJ).
Are You Filling the Role of Informal Caregiver?
If you are a caregiver for someone who requires long-term care services, such as an elderly or disabled individual,j you could be in luck. Under Biden’s tax plan, caregivers could qualify for a new caregiver credit of up to $5,000.
Are You Buying Your First Home?
If you are a first-time homebuyer, under Biden’s tax plan, you could qualify for an advanceable and refundable first-time homebuyer credit with a maximum of $15,000.
Do You Have Traditional Retirement Accounts and make Pre-Tax Contributions?
If you make pre-tax contributions to accounts such as a 401(k) or IRA, the law currently states that your contributions are deductible annually up to your limit. However, under Biden’s tax plan, you would receive a flat credit at a rate of 26% for your contributions.
Do You Pay Childcare Expenses so You Can Work?
If you have expenses related to the care of a dependent child under the age of 13 so that you may work or look for work, you may be entitled to a tax credit since Biden proposed expanding the Child and Dependent Care tax credit. For 2021, the maximum for one qualifying individual is a credit of $4,000, or for two individuals, $8,000. If your AGI exceeds $125,000, the percentage of approved expenses applicable that can be used when calculating the credit begins to phase out.
Do You Own a Corporation?
Biden’s tax plan may affect you if you own a corporation or have substantial corporate ownership interests. For example, the federal corporate tax rate would increase from 21% to 28%. Also, a minimum 15% tax would apply for corporations that book income of $100 Million or more. Next, the intangible low-taxed rate on income would double and would be determined country-by-country. Also, as part of the proposed plan, a 10% surtax would apply to market goods and services sold domestically on corporations that sent service and manufacturing jobs overseas.
Do You own Appreciated Assets That Have a Low-Cost Basis?
While this would exclude pre-tax assets such as most annuities, IRAs, and some other income-related items within your estate plan, Biden’s tax plan would eliminate the step-up in basis element resulting in your heirs taking a carryover basis. This would be a departure from our current laws that state that, on assets held until your death, heirs receive a step-up in basis to the fair market value when these assets pass to them, essentially removing the unrecognized capital gains.
Keep in mind that this is not a comprehensive list and all of these proposals outlined here, aside from those enacted as part of the American Rescue Plan, would need Congress to enact them to become law. Again, it’s possible that any of these provisions outlined here could be eliminated or revised. It’s best to stay in touch with your fiduciary financial advisor as the laws evolve so you can stay ahead of the changes to optimize your plan.
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