With a new president often comes new agendas and philosophical changes. This is especially true with the Democrats controlling the House and picking up important seats in the Senate. President Biden is expected to pitch his “Build Back Better” infrastructure plan on Thursday and how to fund the estimated $3 trillion price tag.
Democrats will be forced to choose between budget reconciliation, which requires only a simple majority in each chamber for passage or securing at least 10 GOP votes in the 50-50 Senate.
Below are four potential changes to taxes that we are watching closely:
1. Increase in Income Tax for the Affluent
For those in the highest tax bracket (currently 37%) there is chatter in DC to raise it back up to the previous level of 39.5% or higher. The tradeoff they are considering is removing the State and Local Tax (SALT) deduction limit of $10,000 or more likely raising the SALT limit. This would be a great benefit for homeowners in high-tax states like California.
2. Increase in Corporate Tax
The corporate tax rate was lowered from 35% to 21% under the Tax Cuts & Jobs Act (TCJA) law in 2017. Many of the individual tax provisions of the TCJA sunset and revert to pre-existing law after 2025, however, the corporate tax rates provision was made permanent. Biden has previously voiced support for raising the corporate tax rate to 28%.
3. Changes to Estate Taxes
There is some concern that the new Congress may want to make significant changes to estate taxes.
Some of the proposed changes could include:
4. Raise Social Security Tax Limits
Under current law, individuals pay 6.2% taxes for Social Security on the first $142,800 in earnings for 2021. Earnings over this amount are not subject to Social Security taxes. There is speculation that this number could be raised to help meet the social security shortfall. There is also speculation about adding a new tier for payroll tax contributions for incomes over $400,000. There could be additional changes to the Medicare taxes as well. Read here about other possible changes to Social Security and Medicare.
5. Other Potential Changes
There has been some discussion on making changes to popular planning strategies as well. There has been speculation but nothing concrete as of yet. Aside from federal changes, we may see more changes at the state level as many states are struggling with budgets in light of the pandemic and they will be searching for additional sources of revenue (read more taxes). This could lead to higher property or income taxes, or other potential changes like developing estate taxes or taxing Social Security. For example, California recently passed Prop 19 possibly triggering higher property taxes for inherited property.
Again, this is a tough item to predict but certainly something we are watching closely.
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