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When Is the Earliest Tax Rates Could Change Under Biden?

By Matthew Frankel, CFP® - Nov 29, 2020 at 6:52AM

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President-elect Biden has proposed some major tax changes, but when could they actually happen?

The best way to sum up President-elect Joe Biden's tax plan would be to say he wants to raise taxes on high-income households and corporations. And he would do this in a few ways. Here are some of the most important parts of Biden's tax plan for Americans to know:

  • Increase the corporate tax rate -- President Trump's tax plan lowered the corporate tax rate from 35% to 21%. While Biden generally agrees 35% was too high, he wants to raise it to 28%.
  • Increase taxes on high earners -- Biden would restore the 39.6% top marginal tax rate that was in effect prior to the 2018 tax year.
  • Phase out the pass-through deduction -- Biden would phase out the 20% Qualified Business Income (QBI) deduction for taxpayers earning $400,000 or more.
  • Increase capital gains tax on high earners -- Currently, capital gains get lower tax rates than ordinary income, but Biden would change this for taxpayers earning more than $1 million.
  • Increase Social Security taxes -- Biden would increase revenue to Social Security by imposing the 12.4% payroll tax (half of which is paid by the taxpayer) on all income above $400,000 in addition to the current structure of the tax.
Notebook with tax reform on the cover.

Image source: Getty Images.

It's worth noting that Biden doesn't just want to increase taxes. For many people outside of the top income brackets, taxes could go down if Biden gets his way. Specifically:

  • Biden wants to increase the Child Tax Credit to $3,000 per qualifying child from the current $2,000 level and add a $600 bonus credit for children under six.
  • Biden wants to significantly increase the child and dependent care credit to a maximum value of $8,000 -- nearly four times the current $2,100 maximum.

When could Biden's changes happen and when is it most likely?

Here's an important point to know. The time when Biden's proposed tax changes could happen and when they're likely to actually take place are two different things.

We'll start with the earliest they could be implemented. Although Biden isn't being inaugurated until a few weeks into 2021 and any tax legislation would likely take several months at a minimum, it's entirely possible that changes could be made retroactive to January 1, 2021. If Biden and Congress agree to raise tax rates on the wealthiest Americans for the 2021 tax year, it's not completely out of the question.

Having said that, the earliest any major tax changes are likely to happen would be for the 2022 tax year, the first full year Biden is in office. This was the case with the Tax Cuts and Jobs Act, also known as the Trump tax cuts. Although the legislation was passed toward the end of 2017 and Trump had been in office since mid-January of that year, most of the changes made didn't go into effect until 2018. In fact, the only major point that was retroactive to 2017 was a relatively minor change to the medical expenses tax deduction.

Will Biden's tax changes pass?

Now that we've discussed when Biden's proposed tax changes could happen, it's important to take a step back and consider whether they're likely to happen. And Biden has very little to do with this part.

In order for any major tax legislation to be signed into law, it will need to make it through both chambers of Congress. Biden shouldn't have much of a problem in the House of Representatives -- it is controlled by Democrats and nothing Biden has proposed is too radical to attract significant opposition from within his own party.

On the other hand, the Senate is a big question mark at this point. Currently the mix is 50-48 in favor of Republicans, but Georgia's two Senate seats are yet to be decided. If Democrats flip both of those seats in the upcoming runoff elections (in early January), it would give a 50-50 split in the Senate, and since Vice President Kamala Harris would have the tiebreaking vote, the Senate would effectively be under Democratic control.

So, to make a long story short, the viability of Biden's tax proposals depends to a large extent on what happens in the Georgia Senate runoffs. A Republican controlled Senate would make any major tax increases a big uphill battle, while a Democratic controlled Senate could make tax reform much more achievable during Biden's presidency.

The Foolish bottom line on Biden's tax plan

The short answer is that the earliest President-elect Biden's tax changes (including increases in the federal income tax rates) could happen would be immediately – as in the 2021 tax year. However, a more realistic timeframe for implementing any potential changes is 2022, and that's if tax changes could get through Congress. And that's a big "if" for the time being.

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