For the first time in years, Democrats will control the Senate following the results of Georgia's runoff races. The two Democratic wins in Georgia resulted in a 50-50 Democrat-Republican split, with Kamala Harris as the tiebreaker. And that could bring Joe Biden's tax overhaul one step closer to becoming reality. Here are some changes that may be in store.
1. Higher taxes for the wealthy
As part of 2017's Tax Cuts and Jobs Act, the top marginal tax bracket was reduced to 37%. That's what individuals earning more than $523,600 are currently paying on their highest dollars of earnings. Biden, however, wants to increase that top tax rate to 39.6% for individuals whose income exceeds $400,000. Obviously, this change won't impact the majority of Americans, but it's something wealthy folks won't be thrilled with.
2. More Social Security taxes for higher earners
Social Security gets the bulk of its revenue from payroll taxes, but there's a wage cap in place that changes from year to year. Currently, that cap sits at $142,800, and earnings beyond that threshold aren't subject to the 12.4% payroll tax earmarked for Social Security. Biden, however, wants to institute a tax on individuals whose income exceeds $400,000.
Here's how that would work. Say someone earns $450,000. That individual would pay Social Security taxes on their first $142,800 of income, and earnings between $142,800 and $400,000 would be exempt. Then, that remaining $50,000 would be subject to Social Security taxes.
3. A higher capital-gains tax rate
Investments held for at least a year and a day and sold at a profit are subject to long-term capital gains taxes, which are lower than the rates for short-term gains on investments held for a year or less. Currently, long-term capital gains top out at 20% for higher earners, but most people pay 15% and some pay zero. Biden is seeking to increase the tax rate for long-term capital gains to 39.6% for people whose income exceeds $1 million.
4. Higher taxes on corporations
Currently, the corporate income tax rate sits at 21%. Prior to the Tax Cuts and Jobs Act, it was 35%. Biden is looking to increase that tax rate to 28%.
Clearly, this won't impact individual taxpayers. But what may happen is that if corporations see their tax burdens go up, they'll aim to compensate by charging more for their products and services. Either way, average Americans could lose out.
How soon might the tax code change?
When Joe Biden takes office, he'll have a number of important tasks to tackle -- a raging pandemic, a sluggish economy, and civil unrest. While Biden has made it clear that tax reform is a priority for him, we shouldn't expect to see these proposals come through right away -- if they even happen at all.
Still, it pays to prepare for these changes, especially if you're wealthy enough to be impacted by them. And even if you're not particularly wealthy, you could still feel the pain if a corporate tax hike takes place, so gear up for that possibility and boost your cash reserves in case it comes to be.