After the 2020 presidential election, there have been many questions regarding whether taxes will increase. It’s as if on one side of the coin, people are saying President Joe Biden’s plans will raise taxes, and on the other side, people say taxes won’t increase. You may be wondering how potential tax changes might affect you as we enter the new year. Here are some important things to consider regarding Biden’s tax plans.
The Current State Of Affairs
Before we dive deeper into the tax changes you could possibly see, let’s discuss the current state of affairs. If you earn money, to determine how much you will pay in federal income tax, you first need to find out your tax rate. You then multiply how much money you earn by the tax rate, and that determines how much taxes you will need to pay.
Consider it this way: If you make $100,000 and your tax rate is 15%, you have to pay $15,000 in federal income tax. That is, of course, unless you take advantage of tax deductions to reduce the amount of tax you owe. A couple of tax deductions that may be at your disposal are those regarding mortgage interest and charitable donations. Then there are tax credits, which can also reduce the amount you owe. Examples of these include the child tax credit, the earned income tax credit and the business tax credit. These credits are dollar for dollar, so if you owe $15,000 in taxes and you get $15,000 in credits, you could potentially zero out and end up not owing anything at all.
What Could Change
Now let’s go over what tax changes you might see. Biden has stated that he won’t be increasing taxes for individual W-2 wage earners (i.e., households earning less than $400,000 per year), which means there likely isn’t going to be an increase in your tax rate. However, depending on your income, the deductions that are available to you could be impacted, as Biden has previously proposed limiting itemized deductions, such as the mortgage interest deduction, for individuals with higher incomes. If that does happen, you could end up paying more taxes in the long run. If you are looking to cushion the blow when a certain tax deduction goes away, make sure to speak to your tax advisor, who can give you the information you need to increase your tax savings.
In addition, his $1.9 trillion stimulus plan includes a proposal to increase the child tax credit to $3,000 for each child 17 and younger and to $3,600 for children under age 6 for one year, in addition to making the credit fully refundable for a year, as well. The plan also seeks to expand the earned income tax credit for 2021 and calls for increasing the maximum credit for adult workers with no children from $530 to nearly $1,500 and also raising the income limit for the credit from $16,000 to about $21,000. If passed, the plan would also make the earned income tax credit available to workers over the age of 65.
It’s important to keep in mind, of course, that all this is based on proposals, and nothing is set in stone yet.
Know What To Expect
After every presidential election, tax policies shift and change, and some are removed or sometimes even reinstated. To prepare as an individual, the best thing you can do is learn how you can be strategic when using the tax codes and always stay up to date on the latest changes. If you are concerned about how potential tax law changes could affect you, be sure to consult with a professional tax strategist or a licensed accountant to find out what you can do to maximize your tax savings, no matter who is in the Oval Office.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.