Comparing The Biden and Trump Tax Plan: How it Affects Individuals

In what seems to have been the most contentious election season to date, it appears there were more issues and policies to discuss than our candidates had time for and the tax attorneys at Evolution Tax and Legal understand just how important potential changes to tax policies are to you.

With the new Biden administration settling down and getting to work this month, taxpayers should be getting ready for some changes to the tax policies we’ve seen for the past four years. Our team has studied all the potential changes to come and we’re breaking them down for you.

Individual Tax Rates

There are currently 7 tax brackets, ranging from 10% to 37% taxed on income, which includes a base rate within each bracket. These brackets vary based on if an individual is a single filer, married and filing jointly with their partner, married and filing separately from their partner, or if they are the head of a household.

Under the Biden Administration, the highest bracket will likely see an increase in their taxes, from 37% to 39.6% of their income. This will largely affect individuals who are making over $400,000 in taxable income yearly. These changes will greatly increase upper-class tax rates, while largely keeping other brackets the same. If you are a member of the qualifying tax bracket, speaking with your tax attorney or accountant to discuss options and your tax strategies moving forward is advised.

Capital Gains Tax Rates

The current Capital Gains Tax Rates vary based on income level: individuals with an income from $0-$40,000 have a 0% rate; individuals with an income from $40,001 to $441,450 have a 15% rate; individuals with an income that exceeds $441,451 see a 20% tax rate on capital gains, which doesn’t include the 3.8% net investment income tax.

Biden’s tax plan will eliminate capital gains tax rates for individuals whose income exceeds $1 million, qualifying individuals would be taxed with the regular individual tax rate on these capital gains, not the preferred rate. These preferential rate opportunities play a major role in long-term securities that appreciate and dividends received by individuals, and the loss of the preferential rate could have a huge effect on capital gains received by individuals with an income exceeding $1 million. If you fall into this category, we recommend speaking with your tax attorney or financial planner to discuss your options and to avoid losing your capital gain opportunities under these changes that could be soon to come.

Employment and Social Security Taxes

Social Security currently accounts for a 12.4% tax on income: this is paid half by the employer and half by the employee, resulting in 6.2% of income paid by both parties. Self-employed individuals pay the full 12.4% on their own. This tax is paid by individuals who earn up to $137,000 in taxable income. At the end of 2020, due to the economic situation created due to the Covid19 Pandemic, President Trump issued a memorandum that would defer the employee payment into social security. This eliminated the 6.2% tax from employees through December 31, 2020.

Biden’s proposed tax plan is to implement the 12.4% Social Security tax on individuals whose income exceeds $400,000. It is unclear if this implementation will have employees paying the full 12.4% or if it will result in the half and half split of the rates between employer and employee.

This implementation will create a system where individuals with incomes below $137,700 and above $400,000 are both paying into social security, while those in between these two income levels do not pay this Social Security tax percentage. With no cap on this Social Security tax for individuals who are earning over $400,000 each year, they could see a large sum of their income going towards this tax under Biden’s plan.

Changes to Estate Tax and the “Basis Step-Up”

As it currently stands, when an asset is transferred to a person upon the passing of a relative (e.g. parent, grandparent, etc.), the asset’s recipient is entitled to a ‘step-up’ in the assets tax basis to fair market value. This, in effect, allows the recipient to sell the asset after receiving it for minimal or no tax on such sale. The policy behind this rule is that the same asset was already subject to the estate tax when passing to the ultimate heir. If taxed again, the government would be double-dipping by taxing it twice – once on the initial passage of the asset to the heir and then again when it is sold.

In order to avoid this double-dipping, the US government provides those with a step up in tax basis so the asset can be sold with no additional tax consequences. However, this may all change very soon. According to the New York Times, the Biden administration is proposing to get rid of this basis step-up that so many US taxpayers have relied on. This, in effect, would put a double tax on the transfer and sale of assets when a relative dies and passes their estate to their ultimate heirs.

Child Tax Credits

Individuals with children and other dependents can currently claim a tax credit of $2,000 for each qualifying child and $500 for other dependents. Biden doesn’t have a clear standing on the child tax credit and instead has focused on expanding the dependent child care credits, with a higher threshold for expenses, ranging anywhere from $3,000 to $8,000 per child.

Biden’s plan also aims to allow for a reimbursement of expenses for care for dependent children. This reimbursement could be as much as 50% for individuals whose income is less than $125,000 and a partial reimbursement for individuals whose income ranges from $125,001 to $400,000. Currently, children under 13 qualify for the child care credit, and children under the age of 17 qualify for the child tax credit, and it is unclear if these age ranges are expected to change under the Biden Administration.

How Can Evolution Tax and Legal Help?

Biden’s proposed tax plans seem to make little changes to individuals with incomes below $400,000 and the few proposed changes seem to be beneficial to these individuals.

However, individuals with an income over $400,000 could see a large increase in their taxes under the new administration. With the increased individual taxes for the bracket, an uncapped Social Security tax, a 2.4% Medicare tax that is uncapped, and the 0.9% additional Medicare tax for individuals with an income of over $250,000 – these individuals could see themselves paying around 50% of their income in taxes in the years to come. In states with high tax rates such as New York and California, these tax rates will be even higher.

In the coming weeks, as changes are implemented and policies discussed, it would be beneficial to speak with an experienced tax professional, who can work with you on a personalized basis to discuss what options are the best to consider. At Evolution Tax and Legal, our team of attorneys and accountants has the knowledge and understanding of the intricate world of tax and policy to develop a strategy that will work for you. Contact our legal team today to learn more about our tax minimizing strategies.