A Summary of President Biden’s Tax Plan

In January, we released our Winter 2021 newsletter, which you can view here. If you are short on time, here are some of President Biden’s main tax revenue proposals:

• The top individual federal income tax rate would rise from 37% to the pre-President Trump rate of 39.6% for high-income taxpayers

.• The corporate rate would rise from 21% to 28%; a 15% alternative minimum tax would apply to corporate book income of $100 million and higher.

• Individuals earning $400,000 or more would pay additional payroll taxes.

• The maximum Child and Dependent Tax Credit would rise from $3,000 to $8,000 ($16,000 for more than one dependent).

• Tax relief would be offered for student debt forgiveness and the first-time homebuyer’s credit would be restored.

• The estate tax exemption would drop by over 50%.

President Trumps Tax Cut and Jobs Act of 2017:

Income Tax Rates: The 2017 legislation reduced federal income taxes significantly through reductions in top rates for high-income individuals and corporations and liberalized business deductions; it provided only minor changes for low- and middle-income taxpayers.

Tax Bracket Adjustments: The 2017 law also replaced the CPI adjustment for tax brackets and thresholds that was intended to keep taxpayers—whose wage increases often reflect the CPI—from being pushed into higher tax brackets due to inflation over time. Instead of the CPI, the 2017 law adjusts tax brackets according to a measure called the “Chained CPI.”3 Because this index factors in the notion that consumers may substitute cheaper items for more expensive ones (chicken for steak, say) when prices rise, it generally shows inflation as lower than the CPI does. Using the Chained CPI is expected to slow down the increase in the bracket and threshold amounts and thereby automatically produce increasingly higher tax bills for individuals over time.4 Although President Biden’s plan criticizes this change as a “secret tax hike on middle-class Americans,” it does not explain if or how it might alter the adjustment.

The Bottom Line: Will the Biden Tax Plan Increase Your Taxes?

That depends on the amount of income that you have earned. Taxes on individual incomes below $400,000 would not face an increase. New and expanded tax benefits, outlined above, including provisions for childcare, first-time homebuyers, educational debt relief, retirement savings, health insurance, and long-term care could reduce taxes for middle-class families. President Biden’s tax plan would, however, increase taxes for most taxpayers with incomes of $400,000 or more. It would reinstate the pre-2017 top marginal tax rate of 39.6 %, substitute flat-rate tax credits for some deductions, including those contributions to retirement plans. Individuals with incomes of more than $1 million would pay the same rate on investment income as on wages, and equity and hedge fund managers would be subject to ordinary income rates on “carried interests.” Also, the payroll tax for Social Security would apply to earnings of $400,000 or more (but not between the current wage base of $137,700—$142,800 in 2021—up to $400,000). The estate tax exemption would fall back approximately to $5.5 million and step-up in basis at death would be repealed.

Note that in order for President Biden’s proposals to become law, the bill would have to pass both chambers of Congress. If you would like to learn more, please email Attorney Michael Wood at mlw@mcswineylaw.com .