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The rise of a new presidential administration often leads to changes in tax laws, and the Biden administration will be no different. Aside from changes in tax brackets, there are many other ways that taxes can change for both individuals and businesses.
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For the most part, the Biden administration seems intent on focusing its tax hikes on what most would consider the richest Americans to earn at least $ 400,000 a year. However, there are a number of tax hikes that may be imminent under President Joe Biden, even for those on lower income. Here’s a quick rundown of 8 ways your taxes can increase during Biden administration.
Change tax brackets
One of the major tax changes introduced by the Biden government is to reset the top tax bracket to the level it was before the Tax Reduction and Employment Act came into force in 2018. In particular, the current tax bracket will increase from 37% to 39.6%. This change only affects those earning $ 400,000 or more. All other tax brackets remain the same. With a theoretical income of $ 500,000, this would increase the tax on the additional $ 100,000 from $ 37,000 to $ 39,600.
Rising capital gains taxes
One of the main advantages of current tax law is the tax structure on investment income. This enables those who have held capital for more than a year to benefit from lower tax rates on profits generated by sales. For most taxpayers, the long-term capital gain rate is only 15%. Individuals with taxable income of $ 80,000 or less may only pay 0% tax on long-term capital gains. For singles earning $ 441,450 or more, or joint filers earning $ 496,600 or more, the capital gain rates increase to 20%.
Under the new Biden proposals, those earning $ 1 million or more will no longer benefit from long-term capital gains tax rates. These high net worth individuals must pay normal income tax on their long-term capital gains.
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Elimination of step-up in base
One aspect of the Biden tax plan that can affect low and middle earners is the elimination of the increase in the base. The increase in base applies to the cost of inherited property when it passes to the heirs, which under applicable law increases to the current market value at the time of the owner’s death. This eliminates any liability for capital gains from passing on to heirs. According to the Biden tax proposal, however, this increase in the base will no longer apply.
As an example, imagine you inherit a $ 500,000 property that your parents cost $ 300,000. Under current tax law, your increased cost base for this property would be $ 500,000 so you would not owe tax if you sold this property right away. In the same scenario, if the base top-up is removed, you owe $ 200,000 capital gains tax on profits.
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If things go according to plan in 2021 – which is far from certain – the global economy will normalize. The widespread use of vaccines will tame the coronavirus pandemic, businesses will reopen and unemployment will fall. In this scenario, it is entirely possible that your income will increase too, especially if you are currently unemployed. In this case, you can expect a higher tax burden in 2021 than in 2020.
Increased social security taxes
One of the more dramatic proposals of the Biden Tax Plan is to impose a 12.4% wage tax on Social Security for workers who earn more than $ 400,000 a year. Currently, the 12.4% Social Security tax, which is shared equally between employers and employees, only applies to incomes up to $ 137,700. The Biden tax structure would thus create a social security tax void, as those who earn between $ 137,700 and $ 400,000 would not be liable for additional taxes.
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Increased corporate taxes
If your business is a corporation, you will likely face higher taxes under the Biden administration. Biden’s tax proposal will raise the corporate tax rate from 21% to 28% and introduce a minimum tax on companies with a profit of at least $ 100 million. This tax would ensure that these companies pay a tax of at least 15% or more if their regular tax liability is higher.
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GILTI taxes doubled
This tax change won’t apply to many Americans, but it could be quite significant for the companies it applies to. Biden has proposed doubling the global low intangible tax income (GILTI) rate from 10.5% to 21%. This tax applies to foreign subsidiaries of US companies. In addition to this doubling, Biden intends to evaluate GILTI country by country. Upper limit for individual deductions
The individual deduction limitation under the Biden Tax Plan applies only to individuals earning more than $ 400,000. For these high earners, however, the amount of their individual deductions is limited to 28% of their value. Under current law, individual deductions are valued at the marginal tax rate of a taxpayer. This means that the individual deductions for high earners are currently valued at 37%, the highest current marginal tax rate.
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Exit from the qualified business exit
One of the main benefits of the Small Business Tax Cut and Jobs Act was the 20% Qualified Business Allowance. This allows business owners to deduct an additional 20% of their income when calculating their taxable income. While the Biden tax plan does not remove this deduction, it will expire for those who earn more than $ 400,000. This will lead to higher taxes for higher income companies.
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Last updated: February 15, 2021
This article originally appeared on GOBankingRates.com: 8 Reasons Your Taxes Can Go Up Dramatically Under The Biden Administration