Taxes are a very nitty gritty topic with many caveats, exemptions, and rules, so the following is meant simply as a high-level comparison of Joe Biden’s proposals compared to where things stand today. And it’s important to remember that, ultimately, Congress has the power to control taxes, so the outcome of congressional races may have just as much impact on potential changes as who wins the White House.
Sum it up, Please
In a nutshell, Biden’s proposals would repeal or revert some of the tax cuts for businesses and high-income individuals that went into effect under the Trump administration’s Tax Cuts and Jobs Act. Biden proposes to raise the top tax rate for individuals who earn more than $400,000, and tax dividends and capital gains at a higher rate for individuals who earn more than $1 million. His proposal would also expand credits and deductions for lower- and middle-income families. Finally, his plan would enact a minimum tax on corporations’ book income1 and increase corporate tax rates.
2017 Tax Reform Highlights
The Tax Cuts and Jobs Act, which went into effect in 2018, temporarily lowered tax rates for individuals and permanently reduced rates for corporations. Here are some of the key provisions:
- Lowered rates for several personal tax brackets (from 10-39.6% to 10-37%) through 2025 (FIGURE 1). The standard deduction increased to offset the repeal of several personal and dependent exemptions. The child tax credit (CTC) increased and the upper threshold for CTC eligibility increased.
- Repealed the tax penalty for not having insurance as originally mandated in the Affordable Care Act.
- Reduced corporate tax rate and repealed the corporate alternative minimum tax (FIGURE 3).
- Imposed the 10.5% minimum GILTI tax (global intangible low-taxed income) to discourage US companies from shifting profits offshore in an effort to avoid taxation.
What About my Taxes?
For personal taxes, $400,000 is a critical number for Biden’s proposals. Taxpayers who hit this income threshold would see their tax bracket increase from 35% to 39.6% (see FIGURE 1
below) and would have a new cap on their itemized deductions and qualified business deductions. Biden’s proposal would also impose a higher, 12.4% Social Security payroll tax on earnings above $400,000. (Note: The Social Security payroll tax is currently capped at incomes of $137,000 subject to annual adjustments. Under Biden’s proposal, there would be a gap for those earning between $137,000 and $400,000). Employees and employers would split this tax evenly, with each responsible for chipping in 6.2%.
The six lower tax brackets would remain the same (FIGURE 1). Under an expanded Child and Dependent Care Tax Credit, families would receive up to 50% for qualified care expenses (up from 35% today), up to a maximum of $8,000 per child (up from $3,000 currently). The child tax credit would also increase from $2,000 today to $3,000 for children 7-17, with an extra $600 per child for young children under six ($3,600). This proposal would also enact a credit for family caregivers.
Finally, Biden’s tax plan would re-establish a first-time homebuyer credit on a permanent basis—a policy that was temporarily in place during the Global Financial Crisis but expired in 2010.
Personal Tax Rates by Bracket Since 2016
|39.6%||37% ↓||39.6% ↑
Source: TaxFoundation.org. * Under current law, single taxpayers at the $400,000 income threshold would fall into the 35% rate. Married taxpayers filing jointly would fall under the 32% rate. Biden’s plan does not specify whether the $400,000 threshold would apply to single or married filers.
Where $400,000 was the critical income threshold for personal taxes, that income threshold jumps to $1 million for Biden’s proposed investment-related taxes. Capital gains taxes are paid when investments are sold at a profit. Under current law, if the assets are held for less than a year, the gains are taxed at the same rate as the rest of your income. If they are held for more than a year, they get a preferential rate (see FIGURE 2). Biden’s proposal would implement ordinary tax rates on long-term gains for those with income above $1 million.
Long-Term Capital Gains Taxes Since 2016
*For incomes above $1 million, the capital gains rate would be the same as ordinary income levels, which would max out at 39.6% in Biden’s proposal. Source: Taxfoundation.org
Getting Down to Business
Biden’s proposals seek to reverse or reduce many of the tax cuts for businesses that were a major component of the Tax Cuts and Jobs Act (FIGURE 3). Some of the key points include raising the overall corporate tax rate from 21% to 28%, imposing a 15% minimum tax on book income, and doubling the tax on foreign profit-earnings (GILTI tax) to discourage US companies from shifting profits offshore.
Corporate Tax Rates Since 2016
|39%||21% ↓||28% ↑|
|n/a||10.5% GILTI||21% GILTI ↑|
It’s important to keep in mind that this is not a fully comprehensive list of Biden’s proposed changes nor the changes that went into effect under the Trump administration’s Tax Cuts and Jobs Act. And though either Trump or Biden would have veto power over tax policy, Congress will ultimately determine the shape of the package that actually makes it to the president’s desk. This means the final result may not only look quite different, but could also take quite some time to implement from start to finish.
Regardless of who is in the White House come 2021, your financial professional can offer guidance on how specific policies could impact your unique financial situation.
Contact your financial or tax professional for details on how tax changes could impact your finances.
1 Book income is the amount of income corporations report to their shareholders. Unlike a corporation’s taxable income, it does not include applicable exemptions and deductions.
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