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February 22, 2021 3 min read
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Historically, Democrats usually advocate a tax hike, especially for high-income households. With President Biden in office now, the Democrat-controlled House of Representatives and a split Senate, it’s no surprise that many business owners wonder if Biden’s grand tax plans will materialize. Here’s what tax changes are likely to occur during the Biden presidency.
Understand the balance
To better understand which initiatives President Biden could pass, it is important to understand the balance of power in Congress. While the house has a Democratic majority of 10 people, the Senate is evenly divided and most tax charges require a 60% vote. This means that every single legislator has the power to prevent a law from being passed. While the Democrats are in control, this does not guarantee that every initiative will be passed. In addition, changes will not be immediate as Biden is currently focused on one more round of pandemic relief.
The focus of Biden’s tax proposal was mainly on interest rate hikes for income, corporate and estate taxes. A significant increase in the estate or corporate tax rate is unlikely to materialize as it will only generate new revenue if President Biden and the Democrats have a strong need to send a message and can convince some of the moderate Republicans to do so that this makes sense. An increase in income taxes seems a little more likely. Currently, Biden plans to increase the tax rate on annual income over $ 400,000 from a maximum of 37% to the old maximum of 39.6%. Knowing this in advance can help you revise your current tax strategy. If you understand and apply the tax law, you can work with your CPA to legally bring your taxable income below $ 400,000.
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The tax law is known as a set of incentives for entrepreneurs and investors. While some incentives remain the same under Biden’s presidency, particularly real estate and oil, new opportunities for clean energy are emerging. In addition to helping restore the $ 7,500 electric vehicle tax credit and improving incentives to capture, use and store carbon, his plan to re-accede to the Paris Climate Accord shows he wants to focus on clean energy and air conditioning. Contact your tax advisor to learn which incentives work best in your tax strategy and how to maximize them.
Possible deduction for state taxes
One change that many failed to consider is a possible lifting of the limit on state tax deduction. New Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi, both from high-tax countries, have urged that state taxes be deductible on federal returns. It is possible that with Democratic control this will become a reality. The challenge in achieving this is the cost, especially since it primarily benefits high-income taxpayers.
In general, taxes won’t come down over the next few years, but the increases may not be as significant as some believe. In this situation, the best attack is a good defense. Having an ongoing tax strategy that you often adjust and revisit is key to lowering your taxes while the Democrats are in control of Washington.
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