Income Tax Increases for Average AmericansThe most eye-widening and picked apart part of any new tax plan for the average American is income tax increases. The Biden administration has been promoting tax relief for those with an annual income below $400,000. If you are in the lower or middle class with a family, you can count on seeing some increases in tax credits to reduce the tax amounts owed. The plan would expand credits for families caring for children and elderly relatives. In addition, there may be credits for long-term care insurance, first-time homebuyers, and people who purchase electric vehicles If you make over $400,000, this is what you may see for your personal income taxes.
- Limiting the tax benefit of itemized deductions at 28% of the value
- Phasing out qualified business income deductions or Section 199A pass-through deductions
- Impose a 12.4% Social Security payroll tax, evenly split between employers and employees
- Restoring the top income tax rate for high-income filers to 39.6% (currently 37%)
- Dividends and long term capital gains taxed at 39.6% on income over $1 million
Tax Increases for Corporations and What This MeansWhen income tax rates increase in the corporate world, the results can have a greater impact on the average American going forward. The proposed Biden Tax Plan outlines increases in corporate tax rates to 28% from 21%. The plan would also add a 10% tax penalty for corporations that send jobs overseas if they could be done here. In addition, the plan offers a 10% tax credit for companies the create jobs in America. It closes the loopholes that allow corporations to get away with paying lower amounts of taxes due to claiming losses from their business. Corporations are used to these scenarios and have ways to offset losses that the company will have from the increase in taxes. Unfortunately, this directly affects consumers. How? Most companies and businesses will raise the price of their goods. The proposed tax plan has a safety net for consumers in this situation. It will set a cap on the total amount that a business or corporation can claim as losses.
Important Things To RememberWe asked Mel what important advice did she want to leave our readers with. Mel stated, “When we discuss bills of this nature, I think it is very important for individuals to understand the difference between a marginal tax rate and an effective tax rate. It also helps if people understand the capital gains rates. Capital gains differ from individual tax rates.” For those that are unaware of marginal tax rates versus effective tax rates, the marginal rate is based on the last dollar of income. Essentially, you are being taxed at the proposed percentage depending on the tax bracket you fall within. While the effective tax rate is the average rate you pay for all of your earned income. When we see increases in tax rates in new tax plans, it is typically a marginal tax rate increase.
Are There Any Changes I Should Make Today?It is best to wait until we have an official tax plan released by the Biden administration before making any drastic changes to your current financial situation. When things are finalized through the senate and the plan is officially released, that is the time that you should begin to act accordingly with your finances. Listen to the podcast here.
The Hopman Group is here to help you plan and give advice. We can help you pursue financial well-being. We are here to help you through the ever-changing tax situations.