President Biden’s administration has outlined a tax policy built upon the agenda introduced during his campaign. Biden’s tax plan focuses on raising taxes on corporations and affluent households, while increasing credits for moderate- to lower-income households. With Democratic control of Congress, changes outlined in President Biden’s tax plan have an increased possibility of becoming a reality. At what time, in what form, and to what extent remains to be seen; however, another round of tax law changes is likely on the horizon. We will take a look at some of the possible changes in this weeks Inside Look at Building Towards Wealth.
There have been many legislative changes over the past several years. The TCJA, SECURE Act, Cares Act and the American Rescue Plan Act have all happened in just the last 4 years.
While acting on these proposals is premature, and nothing contained here is a recommendation for action, we should still become acquainted with what is proposed so that we can know our course of action once changes are implemented.
Do you make pre-tax contributions to traditional retirement accounts (e.g., a 401(k) or IRA)?
Under current law, your contributions are deductible, dollar for dollar, up to your annual limit.
Under Biden’s tax plan, you would instead receive a flat credit for contributions, at a rate of 26%.
What this means for you. If your marginal tax rate is under 26%, meaning your taxable income for 2021 is under 164,925 for filing single or $329,850 for married filing jointly, you would benefit from the proposed change. If your income is above that you would likely not benefit from this change.
Do you have a child under age 18?
Biden proposed expanding the Child Tax Credit in his tax plan, and this was recently accomplished (temporarily) under the American Rescue Plan Act of 2021. The regular rules still apply for this credit, but they now extend to children under age 18, and you may qualify for an increased benefit this year.
In 2021, you may qualify for the Child Tax Credit of $2,000 per qualifying child (fully refundable), subject to phaseouts if your MAGI exceeds $200,000 for single filers or $400,000 if MFJ.
In 2021, you may also qualify for an additional Child Tax Credit of $1,000 for each qualifying child ($1,600 for children under age 6) (fully refundable). This expanded credit begins to phase out as your MAGI exceeds $75,000 for single filers or $150,000 if MFJ.
What this means for you. If you have children under the age of 18 and you meet the income limits you will be getting a noticeable tax credit increase this year. Here is a good article breaking down all the details.
Do you pay expenses for the care of a qualifying individual (e.g., a dependent child under age 13) to enable you (and your spouse, if MFJ) to work or actively pursue work?
Biden proposed expanding the Child and Dependent Care Credit in his tax plan, and this was recently accomplished (temporarily) under the American Rescue Plan Act of 2021.
In 2021, the maximum credit amount is $4,000 for one qualifying individual, or $8,000 for two or more.
In 2021, if your AGI exceeds $125,000 (for any filing status), the applicable percentage of qualifying expenses that can be used to calculate the credit begins to phase out, from the baseline of 50% to a floor of 20%. If your AGI exceeds $400,000 (for any filing status), the applicable percentage will phase out further, eventually to 0%.
What this means for you. If you are a parent and have child care costs you will likely be paying less in taxes because of this.
Are you a first-time homebuyer?
Under Biden’s tax plan, you could be eligible for a refundable and advanceable first-time homebuyer credit of up to $15,000.
What this means for you is that if you qualify as a first-time home buyer you would have another $15,000 to use for your down payment. This could also exacerbate an already frothy housing market that I talked about HERE
Are you an informal caregiver for an individual in need of long-term care services?
Under Biden’s tax plan, you could be eligible for a new caregiver credit of up to $5,000.
What this means for you is if you are taking care of parents or another loved one you could qualify for an additional $5,000 in tax credits.
Are you a small business owner?
Biden’s tax plan would offer credits for adopting workplace retirement savings plans.
What this means for you is that it becomes an even better idea for you to establish a plan for your company. Establishing a retirement plan through your business was already one of the best things you could do for both you and your employees, and now the cost of instituting a plan would be even lower.
Do you hold appreciated assets with a low cost basis (excluding pre-tax assets such as IRAs, most annuities, and other items of income in respect of a decedent)?
Under current law, if you hold the assets until your death, they will receive a step-up in basis to the FMV on your date of death. This effectively eliminates the unrecognized capital gains.
Under Biden’s tax plan, the step-up in basis would be eliminated. This could result in your heirs taking carryover basis, or a recognition event at death.
What this means to you. If you have a taxable account, with assets that have grown in value over the years and were planning on passing to your heirs, you many want to consider selling during your lifetime. This is true particularly if you are in a lower tax rate in retirement and pay some of the taxes now instead of a possible large onetime tax bill given to your heirs.
As I said at the beginning, while acting on these proposals is premature, and nothing contained here is a recommendation for action, we should still become acquainted with what is proposed so that we can know our course of action once changes are implemented.
Generally, the lower your income the better the proposal is for your situation. If your income is above some of the thresholds listed in this post, it provides an excellent opportunity to work with your financial planner or tax professional to discuss ways of lowering your income.