When Joe Biden was elected in November, there was a question of how much policy change there could actually be under the new Democratic president if the Republicans still controlled the Senate. Now, following the elections in Georgia, the odds have increased that at least a portion of President Biden’s agenda will be passed by Congress. Of course, the 50-50 balance of Republicans and Democrats in the Senate, potentially only tipped by the vote of Vice-President Kamala Harris, means that it will not be easy for legislation to pass. The existence of the filibuster imposes a 60-vote requirement for most legislation, although budget-related legislation under the process of “reconciliation” only requires a simple majority. Here’s a look at what we might see under the Biden administration, while keeping in mind that whoever wins in 2024 may have other plans and things could change again.
Higher Taxes for Some…
Many of the provisions in current tax law that were put in place by the Tax Act of 2017, such as lower tax rates and higher estate tax exemptions for individual taxpayers, are set to expire in 2026, but the Biden plan would seek to end some of them sooner. If Congress agrees, people with taxable income above $400,000 would see higher tax rates as well as a cap on their itemized deductions. The top marginal rate, which now applies to taxable income above $628,000 for joint filers, would increase from 37% to 39.6%, where it was prior to 2018. The top tax rate on long term capital gains and qualified dividends could be increased from 20% to the taxpayer’s ordinary income tax rate of 39.6% for those with more than $1 million in income. In addition, wages above $400,000 would be subject to the 12.4% Social Security payroll tax, split between the employer and the employee, although wages between the current cap of $142,800 and $400,000 would not be affected.
The estate tax exemption per person, which is $10 million in 2021, would fall back to the pre-2018 level of $5 million before the current schedule to do so in 2026, and it could possibly fall to $3.5 million, where it was in 2009. Also, the step-up in basis for inherited stocks, homes, and other assets could be eliminated, likely with an exemption of perhaps $1 million.
Under the Biden plan the corporate tax rate would be raised from 21% to 28%, which is still much lower than the previous rate of 35% in effect prior to 2018. (Note: Under the 2017 Tax Act, the 21% corporate tax rate was one provision that would not automatically expire in 2026.)
…Tax Benefits for Others
While the above steps are intended to close the wealth gap from above, other proposals are intended to help people at middle and lower income levels. One such proposal is to increase child and dependent care tax credits. First-time homebuyers could receive a tax credit of up to $15,000 and receive it at time of purchase. If the proposal is passed to forgive a portion of student loan debt, Biden’s plan would exclude the forgiven amount from taxation.
Other provisions are to increase tax benefits for people who pay for long term care insurance with retirement savings and to give a $5,000 tax credit for family members or other loved ones who provide long term care to the elderly. As part of Biden’s climate change initiative, he would like to restore the full electric vehicle tax credit and provide more tax relief for taxpayers who improve the energy efficiency of their homes. And as a benefit to taxpayers in high tax states, the Biden plan would eliminate the $10,000 cap on itemized deductions of state and local taxes, which wasn’t set to expire until 2026.
Modifications to Retirement Plans
The Biden plan would replace the tax deduction for contributions to retirement plans such as Traditional 401(k)s and 403(b)s with a tax credit of a certain percentage, perhaps 25%, that would apply to all contributors, so that everyone, regardless of tax bracket, would receive the same monetary benefit. Currently, the benefit is much greater for people in high tax brackets than for people in lower tax brackets. For example, a $5,000 contribution saves $1,750 in federal taxes for a taxpayer in the 35% tax bracket but only $600 for someone in the 12% bracket. Under the Biden plan, the same $5,000 contribution would save $1,250 in taxes for each contributor. Under another proposal, expanded tax credits would be available for small businesses that offer retirement plans.
The Biden administration is expected to reverse actions taken by the Labor Department under President Trump to discourage the use of ESG funds in employer-sponsored retirement plans. ESG funds invest in accordance with certain environmental, social, and governance criteria.
Enhanced Social Security Benefits
Biden’s plan would change the index used to calculate the annual Social Security COLA increase to something called “CPI-E”, which would track inflation for people over age 62. Based on historical data, this would result in a slightly higher benefit. Also, Biden would like to institute a higher minimum benefit that would be equal to 125% of the Federal Poverty Level. He would also like to increase the monthly benefit for people who have been receiving benefits for more than 20 years, when many may be exhausting their savings. Also, monthly benefits for surviving spouses may also be raised to partially compensate for the benefit reduction that happens after the death of a spouse.
Reforms to the Opportunity Zone Program
In response to criticisms that the benefits of the Opportunity Zone program have not adhered as much to distressed communities as intended and have even been linked to projects such as luxury apartments and hotels, the Biden plan would amend the program. It would ensure that tax benefits to investors would only be allowed if there are clear economic, social, or environmental benefits to a community, particularly one that is underserved. In addition, there would be incentives for partnerships between investment funds and community organizations to produce plans that can provide financial benefits to low-income residents in Opportunity Zones, including job creation and affordable housing.