As soon as they announced that Joe Biden had won the 2020 election, the entire world knew this was going to happen.
No, not the summer season and the end of the emergency measures brought about by the pandemic — although those are likely coming up.
We’re talking about the Biden tax hikes and proposals.
To be clear, nobody likes spending more money than they have to. We all want to have a few hundred or a few thousand extra dollars sitting in our bank accounts at the end of the day. But is all the opposition justified?
If you’re looking for information on the Biden tax hike and you want to know what it could mean for your business or your personal bottom line, you’ve come to the right place. We’re about to tell you what you need to know. All you have to do is keep reading.
Here’s What the Biden Tax Policy Has Looked Like So Far
It’s easier to understand the proposed changes if you think about the tax hikes in two categories: what has passed and what has been proposed. Here’s a quick overview of what the tax situation looks like right now.
What Has Passed
The answer to the question, “What tax policies have been enacted?” is “The American Rescue Act Plan.” Under this plan, individuals could receive cash payments. Many families and individuals who were struggling financially due to the pandemic were able to benefit from the tax credits and subsidies provided under the plan.
Some of these changes included:
- Increased tax credits for children and dependents
- Deductions on health insurance premiums under the Affordable Care Act
- Increased child tax credits
What Has Been Proposed
Alongside the legislation that has passed, the Biden administration also has put forward additional policy proposals that would likely have a more permanent impact. The two headline-making ones include the American Jobs Plan and the American Families Plan. While the jobs-related act would make improvements to infrastructure, the families plan is full of programs for families and children that include nutrition programs, free prekindergarten, permanent ACA subsidies, and more.
Of course, all of these programs and subsidies cost money to run and implement. That’s why the legislation looks to secure funding for these projects by making changes to the individual and corporate tax rates.
Part 1: The Implications of the Tax Rate Changes for Businesses
If the proposals put forward by the presidency come to fruition, business owners and executives will have a lot to discuss with their accountants and their tax professionals. But here’s a general breakdown of the changes that would come about for businesses.
1. The Corporate Tax Rate Would Increase
Since 2018, corporations have seen their tax rates sit at 21 percent. While seven percent may seem like a huge jump, corporations paid as much as 35 percent in taxes from 1994 to 2017. In addition to this general tax rate, the Biden administration would also be looking to implement a minimum rate of 15 percent on companies that are making a profit.
2. Foreign Income for Corporations Would Be Taxed More
The Biden administration would be implementing a minimum tax of 21 percent on profits made through foreign investments. As the situation stands right now, businesses don’t have to pay taxes on the first 10 percent of their foreign profits and they also pay a lower tax rate on money made through foreign investment as compared to domestic rates.
By making plans to implement the lower foreign tax rate, companies that sell products or operate in multiple countries would likely see their profits take a hit.
3. Business Loss Deductions Would Be Impacted
Under the proposed legislation, businesses would no longer be receiving deductions for offshoring-related expenses. In an additional effort to encourage corporations to hire domestically, there would be tax credits granted for the expenses involved with returning operations back to America.
Part 2: What Does the Joe Biden Tax Hike Mean for You?
We’ve talked about how the proposed new tax plans may affect corporations and businesses. But there’s plenty in the proposals that could affect individuals. Here are some of the highlights:
1. Taxes Will Likely Go up for High Earners
According to the new plan, the highest tax bracket for individual federal income will go up from 37 percent to 39.6 percent. In addition to that 2.6 percent tax hike, people who are bringing home more than $1 million a year would also be subject to an increased tax rate of 43.4 percent on capital gains while still paying for Medicare Tax.
Suzanne Clark appeared on “Squawk on the Street” to talk about her intention to oppose the capital gains measure in April of 2021.
But there’s another type of high earner who would likely be taking a hit under the new rules:
Those who are benefiting from being able to avoid paying taxes on carried interest. What this means is that if you or someone you know works for a hedge fund or in investment, the carried interest rule makes it possible for them to avoid paying taxes on those interests until they decide to get rid of them.
In other words, hedge fund owners and partners in charge of private equity firms could experience an even bigger tax increase on top of the tax hikes that they are likely to experience as top earners.
2. Families Will Get More Child Tax Credits
Remember the temporary measures we talked about in the America Rescue Plan? The Biden administration recently made headlines for the introduction of the expanded child tax credit. If the Democrats prevail on this issue, provisions like the child tax credit and the maximum credit for children and dependents would be kept in place beyond 2021. For families who have children under the age of 17 living in their households, this would likely result in increased tax benefits.
3. Permanent Premium Reductions for ACA Health Insurance Coverage
Although the initial move to reduce ACA health premiums was intended to be more temporary, the current slate of proposals would extend the tax credits while reducing monthly payments.
4. Many Tax Deferral Rules Related to Real Estate Sales and Inheritance Taxes Would Likely Be Repealed
There are a number of rules and loopholes that have been in place for years that make it possible for real estate investors or people inheriting homes to avoid paying capital gains tax. These would include:
- The step-up in basis rule
- The like-kind exchange rule
Under the proposed tax regime, families who aren’t passing down family farms would likely have to pay taxes on the increased value of the land while real estate investors would not be able to continuously defer paying taxes on their capital gains after a certain point.
Should You Be Worried About the Joe Biden Tax Hike?
When times are as rough as they’ve been, it’s easy to disagree with Joe Biden on tax hikes when you’re panicking at the thought of forking over even more of your hard-earned cash. But would these changes affect you all that much? We’ve put together a list of people who most likely be paying more and a list of those who would likely be benefiting under the new plan.
If you fall under one of these categories, you may have to pay more under the proposed changes:
- Business Owners and Corporate Executives
- High-Income Earners
- Multinational Corporations with Foreign Income
- Real Estate Investors
- Families Who are Passing Down Property
If you fall under one of these categories, you may stand to gain from the Joe Biden tax hikes:
- Families with Young Children
- Low-Income Earners
- Young Workers
- Minorities
Are the Biden Tax Hikes Coming to a Bank Account Near You?
No matter which way you slice it, the proposed Biden tax hikes are designed to be impactful and far-reaching. If you are a high-income earner or on the board of an offshoring, multinational corporation, you’ll likely see your financial situation impacted by the proposals. If you are not in the top one percent tax bracket.
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