In the past, wealthier Americans would defer income around tax time in order to have less taxable income. This was a good strategy for the last 30 years, during which the government has been cutting taxes. However, the Biden administrations tax code could change things for Americans starting as soon as 2021. Here’s what you need to know about the upcoming changes and what you can do to lessen the strain on your accounts when tax season rolls around.
- Lower income earners won’t be affected
Americans earning under $400,000 a year won’t have to worry about the upcoming changes to the tax code under a Joe Biden administration. Instead, lower-income earners can expect benefits like increased credits for dependent care and retirement saving.
2. An increase in the marginal tax rate from 37% to 39.6%
President Donald Trump’s Tax Cuts and Jobs Act had previously lowered the rate. This increase would mean that any income someone earns over $400,000 would be taxed at 39.6% instead of 37%.
3. Caps the tax benefit of itemized deductions at 28% of their value.
This means anyone earning over $400,000 won’t have as many options when it comes to their itemized deductions.
4. Increase in the capital gains tax
Under a Biden plan, capital gains would be taxed at 39.6%, which is the highest marginal tax rate. This would be for people earning over $1 million a year. Under the current administration, the capital gains tax is 20% for people making over $441,451.
5. Lowers the amount wealthy people can pass on free of tax
The new tax code will reduce the amount a rich person can leave to their heirs without gift or estate taxes. Right now, the amount exempted from gift and estate tax is $11.58 million per person.
If you’d like to reduce the burden of the new tax code, you need to find ways to accelerate income this year while deferring expenses to the next.
There are a few ways to do this:
- Accelerate bonus payments to recognize on 2020 returns
- Exercise stock options this year.
- Hold off until next year for charitable donations
- Convert some or all of a traditional IRA into a Roth IRA
There will likely be more changes to the code before all is said and done. contact us for more advice on how to stay on top of your taxes and to learn more about how to improve your finances.