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. The timing, scope, and degree of changes remain uncertain; however, a change in the tax laws is a reasonable expectation.
For American taxpayers, it’s understandable to have questions and concerns regarding these proposed changes. While it may be early to make specific recommendations, it’s essential to examine these potential future tax law changes. You can discuss how to position yourself for planning opportunities with your fiduciary financial advisor.
Here are some questions to ask yourself regarding 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 under the American Rescue Plan Act of 2021. The Child Tax Credit of $2,000 applies for each qualifying child under 18, subject to phasing out if your Modified Adjusted Gross Income (MAGI) exceeds $200,000 (single) or $400,000 (married filing jointly).
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), you may benefit from Biden's tax plan. Under the proposal, 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 current law allows deductible contributions up to your annual limit. Under Biden's tax plan, you would receive a flat credit at 26% for your contributions instead.
Do You Pay Childcare Expenses so You Can Work?
If you have childcare expenses for a dependent child under 13 to enable you to work or seek employment, you may qualify for a tax credit. Biden proposed expanding the Child and Dependent Care tax credit. For 2021, the maximum credit is $4,000 (one dependent) or $8,000 (two or more). The percentage phases out if your AGI exceeds $125,000.
Do You Own a Corporation?
Biden's tax plan may significantly affect you if you own a corporation or have substantial corporate ownership interests. Key proposals include:
- Federal corporate tax rate increase from 21% to 28%
- Minimum 15% tax on corporations with $100+ million in book income
- Intangible low-taxed income rate would double, determined country-by-country
- 10% surtax on goods and services sold domestically by corporations that moved jobs overseas
Do You Own Appreciated Assets That Have a Low-Cost Basis?
Biden's tax plan would eliminate the step-up in basis for inherited assets, requiring heirs to take a carryover basis instead. This would be a significant departure from current law, which gives heirs a step-up in basis to fair market value when assets pass to them.
Note: This would exclude pre-tax assets such as most annuities and IRAs.
Keep in mind that this is not a comprehensive list. All of these proposals, aside from those enacted as part of the American Rescue Plan, would need Congress to enact them to become law. Any of these provisions 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 and optimize your plan. For current limits on retirement account contributions and Roth IRA eligibility, see our annual tax and retirement savings reference guide.
Start a conversation with us to discuss how we may help you navigate these potential tax law changes and integrate them into your overall financial planning strategy.
