With President Joe Biden now in the White House and Democratic control of Congress, new tax law changes are anticipated on the horizon for 2021. Below is a basic summary of what to expect based on the proposed plan announced last year, and how it may impact your tax liability. Under the new proposed plan, those who earn more than $400,000 per year would see the largest tax increases while families and home buyers would enjoy new tax breaks.
Tax Savings For Families
The Child and Dependent Care Tax Credit (CDCTC) would increase from a maximum of $3,000 to $8,000 for families with one child and $16,000 for families with two or more children. The maximum reimbursement rate for dependent care expenses would increase from 35% to 50%. The Child Tax Credit (CTC) would increase from a maximum of $2,000 per child to a maximum of $3,600 per child, fully refundable regardless of the taxpayer’s income level. First-time home buyers would receive a $15,000 tax credit. (1) The plan also proposes to expand the Earned Income Tax Credit (EITC) and eliminate the age cap for older workers for the tax year 2021. (2)
Increased Tax Rates For High Earners
The sharpest tax increases under President Biden’s proposed plan would apply to those with incomes higher than $400,000:
- The maximum income tax rate would increase from the current 37% to a maximum of 39.6% for taxpayers with income above $400,000.
- Social Security and Medicare tax would be imposed on earnings between $400,000 and $600,000, in addition to taxes within the FICA wage base ($142,800 in 2021, up from $137,700 in 2020). Social Security and Medicare taxes would not be imposed on earnings between $142,800 and $400,000 (referred to as a “doughnut hole”).
- The Pease Limitation, repealed by the Tax Cuts and Jobs Act (TCJA), would be reinstated, which reduced the amount of itemized deductions by 3% for every dollar of AGI above defined thresholds ($261,500 for single filers and $313,800 for married filing jointly in 2017). (3)
- The tax value of itemized deductions would be capped at 28% for taxpayers with earnings higher than $400,000. This would result in losing 11.6% of the deduction value for a taxpayer with earnings taxed at the new top rate of 39.6%.
- The Qualified Business Income (QBI) deduction would be phased out for taxpayers earning more than $400,000.
- The corporate tax rate would increase from the current 21% to 28%, with an additional 15% tax on book net income for companies showing a net income above $100 million.
Capital Gains And Appreciated Assets
One aspect of President Biden’s proposed plan would most notably affect high-net-worth families; the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Exemption would be reduced to $3.5 million for estates and $1 million for gifts. The current combined maximum is a record high of $11.58 million per individual, scheduled to sunset at the end of 2025, after which the limit decreases to $5 million. The current maximum does not include a “clawback” provision, meaning that the IRS cannot retroactively apply higher tax rates to prior gifts. In addition, other tax shelters for capital gains could disappear:
- The top tax rate for long-term capital gains (LTCGs) would nearly double to 39.6% from 20%.
- The step-up in basis for LTCGs would be repealed, so heirs would be liable for the tax burden of appreciation on a deceased person’s assets after inheritance. (4)
- Like-kind real property exchanges (1031 exchanges) could potentially be eliminated. (5)
If you would like to learn more about how we can help you adjust your financial strategy in light of the coming tax changes this year, reach out to us at (559) 440-6999 or send us an email at email@example.com to schedule a consultation.
T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.