Biden wants to end Trump’s tax cuts for the wealthy
House Democrats have proposed legislation that could end Trump’s tax cuts for the wealthy and corporations. If passed, this could implement some of the biggest tax increases in decades. But while these tax changes aim to deliver on President Joe Biden̵[ads1]7;s promises to tackle inequality, they are on a smaller scale in an effort to win over moderate Democratic support. The new plan proposes raising the top capital gains tax rate from 20% to 25% instead of nearly doubling it to 39.6% as Biden had originally proposed. And the corporate tax rate would only go up to 26.5% instead of 28%. Let’s break down how these tax changes could affect you. A financial advisor may be able to help with tax planning. SmartAsset’s free advisor matching tool can match you with financial advisors in your area.
What was originally proposed?
Initially, President Biden put forward a series of tax proposals that included raising the top capital gains tax rate from 20% to 39.6%. With the high-income Medicare tax at 3.8%, the top rate would be 43.4%. Under his original plan, both short-term and long-term capital gains would be taxed the same, with the top income tax bracket at a rate of 39.6%.
Biden also proposed eliminating a loophole that allows capital gains to be transferred as part of an estate to avoid taxation. The president suggested that the IRS needs to do a better job of auditing high earners to ensure they pay their fair share. Tax increases are also designed to help finance an increase in IRS oversight.
What does the current proposal look like?
House Democrats just released an updated version of the tax overhaul outlined by Biden in April. While there are certainly consistent themes, some of the numbers have been dialed back. This move likely stems from the fact that Democrats do not want to alienate voters before the midterm elections in 2022. There are also certain political constraints to enacting such drastic changes. However, it is also likely that Biden aimed high, knowing that Congress would try to rein in his ideas.
The new proposal contains a number of different parts. It would raise the corporate tax rate from 21% to 26.5% for businesses reporting more than $5 million in revenue. It would raise the top income tax bracket from 37% to 39.6% for households earning more than $450,000 annually and individuals earning more than $400,000 annually. The top tax rate for capital gains will rise more modestly, from 20% to 25%. An additional 3% surtax on those earning more than $5 million annually is also in the works. Another important provision that Democrats want to include is $80 billion in IRS funding over the next decade. Such a package has the potential to collect hundreds of billions of dollars in lost tax revenue over the same time period.
Who does the proposal affect?
A key feature of both the original and updated tax proposals is the fact that they are designed to affect only extremely high incomes. As a result, most people will not be affected by changes. The increase in the top tax rate, for example, only affects those who earn at least $400,000 annually. Companies that raise more than $5 million annually are the only ones that will see any change. Businesses that bring in less than $400,000 will actually see their tax liability shrink.
The new top gains tax rate would work in the same way. In 2021, you will only owe the increased top rate of 25% if you are an individual filer earning more than $445,850 or married and collecting while earning more than $501,600. The 3% surtax only applies to those earning more than 5 million dollars within a year. Needless to say, these changes really only affect a percentage of the top 1% of earners.
How should you react or prepare?
Unless you or your business brings in a significant amount of money each year, you probably don’t need to worry about the effects of the new tax proposals. But if you’re concerned about reducing your overall tax liability, you can maximize your contributions to tax-free or tax-deferred retirement accounts like 401(k)s and contribute to a tax-free health savings account (HSA), among other tax strategies.
For those making millions in capital gains, a financial advisor can help you understand your options if the new tax proposal becomes law.
The bottom line
While the new tax proposal presented by House Democrats is smaller in scale than what Biden had originally presented, it still has major implications for federal spending over the next decade. These changes could reportedly raise $2.9 trillion in new revenue to help fund important parts of America’s social safety net. The House Democrats’ proposal still needs to be passed in the Senate before it can be signed into law, and even then it is only planned to affect some of the highest earners in the country’s top 1%. However, there are still tax moves you can make to prepare.
Tips for tax planning
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