How Biden’s Tax Plan Could Impact Your FinancesBy Lee Korn | October 22, 2020
The presidential election is right around the corner, and millions of Americans have already cast their votes. It’s impossible to predict who will come out on top, although former Vice President Joe Biden has been leading in recent polls. Of course, past elections have shown us that polling isn’t always accurate, but Americans still need to financially prepare for either outcome.
Biden’s tax plan has been a centerpiece of his campaign. According to his website, it’s predominantly focused on providing middle-class tax cuts. However, tax increases would be on the horizon for those earning $400,000 or more per year.
If Biden is elected into office and his proposed tax changes are passed by Congress, high-income earners will likely need to make tweaks to their financial plans. Here’s what a Biden presidency could mean for your taxes—and why now is an especially important time to connect with your financial advisor.
A Big-Picture Look at Joe Biden’s Tax Plan
Biden’s tax plan is aimed at generating over $3.3 trillion in extra tax revenue by 2030. As such, USA Today reports that the highest-earning Americans would provide roughly 80% of that additional tax revenue. That would bring the top tax bracket back up to 39.6%, which is where it was prior to President Trump enacting the Tax Cuts and Jobs Act of 2017.
It’s important to note, however, that it isn’t clear at this point if that $400,000 income threshold applies to individual or joint filers. Still, MarketWatch reports that taxes for the top 1% of earners could go up 13% to 18% under a Biden presidency. Another key component of Biden’s tax plan is upping the corporate federal income tax rate from 21% to 28%, according to The Tax Foundation, an independent tax policy nonprofit.
Biden says he plans to use additional tax revenue to invest in things like health care, infrastructure, and Social Security, among other initiatives.
Other Ways Biden’s Tax Plan Could Impact High-Income Earners
According to The Tax Foundation, here are some other details of Biden’s tax plan that, if passed, could affect your tax responsibility.
- The Child Tax Credit, which applies to all taxpayers, would go up. It’s currently set at $2,000 for children under 17, but would jump to $3,600 for kids under 6; $3,000 for children aged 6 to 17.
- The Qualified Business Income (QBI) tax deduction would be eliminated for pass-through business owners earning $400,000+ per year in individual annual income. Under current law, eligible taxpayers can claim a deduction equal to 20% of qualified business income, depending on how their business is structured.
- The plan would cap itemized deductions for upper-income earners at 28%, down from the current rate of 39.6%. If you choose to itemize, you’d be able to deduct 28 cents for every dollar you spend on qualifying expenses.
- Biden’s tax plan would trigger higher capital gains taxes for high-earning households. Heirs who inherit assets could also pay more in capital gains taxes.
- Due to a reduction in the lifetime estate and gift tax exemption, you could see an increase in estate taxes.
- In an effort to even the playing field for lower- and middle-class families, Biden is proposing a flat retirement contribution credit of 26% of the contribution amount, according to reporting from CNBC. This would replace the tax-deduction you get with 401(k) and traditional IRA accounts, which could increase your tax burden if you’re a higher-income individual.
How to Prepare Your Finances for a Biden Presidency
What does this all mean for your financial health? Under a Biden administration, high earners could encounter elevated taxes. If the above tax changes go into effect next year, it would be wise to connect with your financial advisor sooner rather than later to map out a game plan. For example, they may suggest investing more heavily in Roth IRAs or exploring Roth conversions to offset the impact of the proposed retirement contribution credit. Similarly, estate planning strategies can offer ways to lock in the current estate gift exemption if you make these plans before the end of the year.
It’s impossible to say who will ultimately take the White House in 2021, but preparing for potential tax changes can help you avoid unwelcome financial surprises down the road. At Opal Wealth Advisors, we take the long view to help clients anticipate hurdles before they ever come to pass. We’re here to review your wealth management plan, answer your questions, and put you in the best position for success. Schedule a call today to discuss how these proposed tax changes could impact your financial goals.
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