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Biden Tax Calculator: How Might Your Taxes Change?

By TaxWealth -

Source: Forbes

President Joe Biden campaigned on a promise to raise taxes on wealthy Americans and corporations. His core tax proposals will increase taxes on people earning more than $400,000 per year and raise corporations’ tax rates from 21% to 28%.

And although his tax plan will impact the bottom line of the wealthiest of Americans, low- and middle-income households may benefit from increased tax credits.

To understand how Biden’s presidency could impact your taxes, use our calculator to determine how much you might pay under his tax plan.

Disclaimer: This tool is for educational purposes only and should not be used for tax preparation purposes. Your actual tax payment or refund may vary depending on several factors. This tax calculation omits certain deductions and credits for simplicity. We suggest seeking a tax professional’s advice to determine how any tax code changes would impact your financial situation.

Frequently Asked Questions (FAQs) About Biden’s Tax Plan

Will These Changes Happen in Time For the 2021 Tax Season?

The changes will not take place quickly enough to affect the 2020 tax return (most Americans’ 2020 taxes will be filed in spring 2021). Former president Donald Trump ran on a platform that included sweeping tax cuts, but he was in office for nearly a year before his signature tax law, the Tax Cuts And Jobs Act (TCJA), passed.

With Democrats taking a slim majority in the Senate, Biden’s chance of passing a major tax law has increased but remains slender as he would need unanimous Democratic support plus some Republican votes.

However, Biden has one potential trick up his sleeve: Budget reconciliation. This is a special process that makes it easier to pass budget legislation (including tax law changes) through the Senate and only requires a simple majority (51 votes) to pass a bill. This is how Trump passed The Tax Cuts And Jobs Act at the end of 2017.

Will The Federal Tax Brackets Change if Biden’s Tax Plan is Made Law?

Yes, but only for the wealthiest Americans. Individuals earning more than $400,000 per year will see a significant change under Biden’s tax plan. According to the Tax Policy Center, if you earn $790,000 or more, you can expect to pay an average of 16% of after-tax income. Also, the top-tier tax bracket rate will increase from 37% to 39.6%.

If you earn more than $1,000,000, you’ll see an increase in the long-term capital gains tax rate, which is a special tax assessed on assets held longer than a year. Lastly, Biden proposes a 28% tax cap on itemized deductions, and the elimination of the qualified business income tax deduction for those earning more than $400,000.

Bloomberg notes that if Democrats control both chambers of Congress, they will also control the tax-writing committees in both chambers, potentially enabling Biden to pass major tax policy changes.

What Will Happen To Tax Credits?

Biden doesn’t plan to raise taxes on low- to middle-income taxpayers. However, this group can expect to see changes to some tax credits, which means they may end up with more money back in their pockets. These include the child tax credit, child and dependent care credit, and earned income tax credit. Biden also plans to implement a retirement tax credit for those saving to a 401(k) plan, a renter’s tax credit, and reinstate the home buyer tax credit.

What Are The Proposed Child Tax Credit Changes Under Biden’s Plan?

As part of his $1.9 trillion American Rescue Plan, Biden proposed a temporary expansion to the Child Tax Credit.

Biden seeks to increase the child tax credit for qualifying children from $2,000 to $3,000. Those who have children under the age of 6 would receive an additional $600. Biden also proposes to make the credit fully refundable.

Under the current law, a taxpayer can claim the child tax credit of up to $2,000 for qualified children under 17. This credit is a refundable credit up to $1,400, which means if the credit is more than the amount of taxes owed, the taxpayer can expect money back. This credit phases out for anyone earning $200,000 or above ($400,000 for married couples filing jointly).

What Are The Proposed Changes To The Earned Income Tax Credit (EITC)?

Biden proposed a temporary expansion of the EITC as part of his American Rescue Plan with the aim of helping low-income workers. He would raise the EITC for an adult with no children from about $530 to around $1,500. The income limit needed to qualify would increase from around $16,000 to about $21,000. The EITC is one of the most popular tax credits in the U.S.  As of December 2020, about 25 million eligible workers and families claimed the credit and the average amount claimed was $2,461 during the 2020 tax filing season.

What Would Change With The Child and Dependent Care Credit?

Biden’s tax plan seeks to increase the child and dependent care credit qualifying expenses from $3,000 to $8,000 ($16,000 for two or more dependents).

Under the current law, a taxpayer can claim the child and dependent care credit for qualified expenses for dependent care. Taxpayers may deduct $3,000 ($6,000 for two or more dependents) of the costs paid for dependent care on their federal income tax return.

The dependent must be under the age of 13, a spouse or another qualifying individual who cannot care for themselves. The allowable tax credit will depend on the taxpayer’s income.

Calculator Methodology

This calculator’s primary purpose is to compare Biden’s key tax proposals with the current tax law to show expected tax changes. It does not compare other income, deductions, or credits that are expected to remain unchanged even if Biden passes a new tax law. This calculator and its inputs are based on information from the current tax law (the 2017 Tax Cuts and Job Acts), the 2020 projected tax brackets, and core key policies proposed by Biden as follows:

Biden’s key tax proposals

  • Increase tax rate from 37% to 39.6% for households earning $400,000 or more;
  • Child tax credit increase from $2,000 to $3,000 ($3,600 for those under the age 6);
  • Child and dependent care credit increase from $3,000 to $8,000 per dependent ($6,000 to $16,000 for multiple dependents); and
  • Cap itemized deductions to 28% for households earning more than $400,000.

Limitations of this calculator

  1. The estimated taxes or projected refunds do not consider the earned income tax credit (EITC), additional Medicare taxes assessed on high-income earners, capital gain taxes, or self-employment taxes that may impact your tax situation.
  2. The child and dependent care credit do not consider dependents and spouses who are physically or mentally incapable of self-care over 13 years of age.
  3. We modified the 2020 tax brackets to reflect Biden’s tax proposals. For single and head of household taxpayers, we adjusted the 35% tax bracket to reflect upper-income limits of $400,000. For married couples filing jointly, we adjusted the 32% and 35% tax brackets to reflect the upper-income limits of $400,000. For all taxpayers, we replaced the 37% with Biden’s proposed tax increase of 39.6% for incomes over $400,000.

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