Fernway DiarySM

Jan 09, 2021

The incoming Biden administration has promised tax relief for working families and potentially major shifts in US Federal tax laws. This could come in the form of a variety of tax cuts and tax credits. The new administration wants to repeal parts of the 2017 tax law. How much change their administration is able to effect will depend greatly on cooperation from the House and Senate. If passed, here is an overview of key changes proposed by President-elect Joseph Biden and his team, and its impact on individual taxpayers in the United States:

Tax Brackets

Tax rate changes for individuals under the incoming Biden administration will vary greatly depending on the precise income tax bracket you and your family fall under. For middle-class families, the new administration has promised individuals making under $400,000 per year will not see an increase in their federal income tax rate.

Those in the top individual income tax bracket, will see their federal income tax rate raised back up to 39.6, from the current 37 rate. Also, the new administration has indicated introducing a new 12.4 Social Security tax on wages above $400,000. This implies that wages between $137,700 (the current Social Security wage cap), and $400,000 are likely not going to be subject to this tax.

Capital Gains & Qualified Dividends

Under current law, a capital gains tax rate of up to 23.8 applies on long term capital gains and qualified dividends. The new administration proposal increases the top tax rate on long-term capital gains for taxpayers earning more than $1 million annually to 43.4.

Child Tax Credit

An expansion of the Child Tax Credit (CTC) is supported by the Biden administration, as proposed in the House-passed HEROES Act. A CTC expansion would increase the refundable CTC to $3,000 per child for children ages 6 to 17, and $3,600 for children under 6. The plan proposes expanding the child and dependent care credit to $8,000 per child (up to $16,000), and making it refundable and payable in advance.

Healthcare

The administration’s plan would also provide refundable tax credits for healthcare insurance premiums so as to limit spending on insurance premiums to no more than 8.5 of income. In addition, the plan proposes an increase in tax benefits for the purchase of long-term care insurance.

Home-buying

This new administration would like to reinstate the first-time homebuyer tax credit at a maximum of $15,000 for first-time home purchasers. This would be refundable and advanceable to help buyers at the time of purchase.

Elderly care

In addition to enhancing childcare programs, the new administration intends to increase eldercare programs within their proposed $775 billion plan. The plan would increase pay for caregivers and eliminate the waiting list for home and community services under Medicaid. In addition to this, a new $5,000 tax credit for caregivers is being proposed with certain physical and cognitive needs.

Student loan forgiveness

Currently, student loan debt that is forgiven within the federal system is classified as taxable income, while public service loan forgiveness programs are forgiven tax free. The new administration intends on excluding federal student loan debt forgiveness from taxable income.

Limitation on itemized deductions

Prior to the 2017 Tax Cuts and Jobs Act, a limitation on itemized deductions (the “Pease Limitation”) took effect at higher income levels (in 2017 it was $318,700 for joint filers, $287,650 for heads of household, $261,500 for single filers, $156,900 for married taxpayers filing separately). Biden proposes restoring the Pease Limitation on itemized deductions for taxable income above $400,000. The plan would also cap the value of the rate at which itemized deductions can be taken to 28, which affects those in tax brackets above 28, as their rate to determine itemized deductions would be reduced from their actual income tax bracket.

Conclusion

Though majority of the above tax increases impact high-income households, individuals of all income levels should pay close attention to the above legislative changes on their personal tax situation. It is difficult to say with certainty how much success the Biden administration will have in implementing the above proposal, though specific elements of the above are more likely than others to take effect. Also, the enactment date on these changes remains unclear.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.