Back in 2017, the Tax Cuts and Jobs Act overhauled the tax code -- both for better and for worse, depending on who you ask. Now that Joe Biden has taken office, he has his own tax changes in mind that could put more money in some people's pockets, but negatively impact our country's wealthiest at the same time. Here are a few specific changes that may come to be.
1. A higher marginal tax rate for the wealthy
President Biden wants the country's wealthiest to pay their share of taxes. To this end, he's seeking to raise the top marginal income tax rate from 37% to 39.6%. Marginal tax rates are what people pay on their highest dollars of earnings. Prior to the Tax Cuts and Jobs Act, the top marginal rate sat at 39.6% for the country's highest earners, so the Biden administration is simply seeking to reinstate that.
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2. More Social Security taxes for higher earners
Workers don't pay Social Security taxes on all of their earnings. Each year, there's a wage cap that exempts earnings beyond a certain threshold. Right now, that cap is $142,800, and earnings in excess of that aren't subject to a 12.4% Social Security tax. But Biden wants to implement that tax for wages over $400,000. To be clear, workers making over $400,000 wouldn't pay Social Security taxes on earnings between $142,800 and $400,000. Rather, that added tax would come into play for earnings on top of $400,000.
3. A higher corporate tax rate
The Tax Cuts and Jobs Act lowered the top corporate tax rate from 35% to 21%. The Biden administration is seeking to raise that top rate to 28%. While this change wouldn't affect individual taxpayers directly, it would likely trickle down to consumers indirectly in the form of higher-cost goods and services.
4. No more tax breaks on long-term capital gains for the wealthy
Investors who hold stocks for at least a year and a day before selling them at a profit get taxed at a more favorable rate than stocks held for a year or less. Long-term capital gains tax rates currently max out at 20% for the country's highest earners, and most people pay 0% to 15% for long-term gains. Biden, however, wants to increase the long-term capital gains tax rate to 39.6% for those earning over $1 million. In doing so, he'd effectively negate the benefit of holding investments for longer than a year, since that 39.6% is, conceivably, what the richest would pay for short-term gains as well.
It's worth noting that lower tax rates on long-term capital gains have helped many wealthy Americans keep their IRS burden to a minimum through the years. In fact, investing legend Warren Buffett has notably claimed that he pays a lower marginal tax rate than his secretary due to the fact that long-term capital gains are treated so favorably.
5. A $15,000 first-time homebuyer credit
Homeownership offers a number of tax benefits but is out of reach financially for a lot of people. Biden is looking to change that by implementing a $15,000 credit for first-time buyers. Known as the First Down Payment Tax Credit, the credit would be both refundable and advanceable. This means the IRS would pay filers who claim the credit even if their tax liability is knocked down below $0, and that filers would be able to access the credit before filing a tax return.
A Democrat-controlled Senate could mean big changes
With Democrats now taking the lead in the Senate, Biden's tax proposals have a greater chance of passing. But that doesn't mean all of the above ideas will come to be and that there won't be backlash and resistance. For the most part, Biden's tax changes will only impact the country's wealthiest for the worse, so the average American generally has little to worry about. Either way, it will be interesting to see what tax changes are implemented in the course of Biden's time in office.
