Individuals
Tax Brackets The Biden tax plan reverts the top income tax rate to 39.6% (currently at 37%) for taxpayers with more than $400,000 in taxable income. As the 35% rate currently applies to those with income over $400,000 for married filing joint or over $200,000 for single, head of household, and married filing separate status filers, the income levels associated with the remaining tax brackets would need to shift in order to keep Biden’s promise to only increase taxes on top earners.
Capital Gain Rates
Biden proposes to eliminate the preferential rates on capital gains and qualified dividends for taxpayers with income of more than $1 million and subject such income to the highest ordinary rate (39.6%). The net investment income tax rate would remain at 3.8%.
Estate/Wealth Tax
Current tax law allows for an increase (step-up) in the basis of inherited assets to the fair market value at the date of death of the original owner. The stepped-up basis prevents the new owner from being taxed on wealth accumulated during the life of the original owner.
Additionally, there is a lifetime gift and estate tax exemption of $11.7 million of total estate value for 2021 ($11.58 million for 2020). Under current law, the top tax rate is 40%, and after 2025, the lifetime exemption amount reverts to $5 million. The Biden tax plan proposes eliminating the ability to step-up, increases the top tax rate to 45%, and reverts the estate tax exemption amount to the 2009 lifetime exemption of $3.5 million.
Credits and Deductions
• Earned Income Tax Credit (EITC). The Biden tax plan would expand the EITC to older workers that do not have a qualifying child. Currently, this credit is only available to individuals under the age of 65. A temporary version of this credit was included in the ARPA.
• Childcare Credit. The Biden tax plan proposes increasing the maximum credit for childcare expenses to $8,000 for one child and $16,000 for two or more children (currently it’s $3,000 for one child or $6,000 for two or more children) and making the credit refundable. Costs eligible for the credit would include up to half of the family’s spending on childcare for children under the age of 13 (for families making less than $125,000 with partial credit for families making between $125,000 and $400,000). A temporary version of this credit was included in the ARPA.
• Child Tax Credit. Biden’s tax plan calls for this credit to increase to $3,000 per child for children (ages 6 to 17) and $3,600 for children under age 6 for 2021 or as long as economic conditions require. Additionally, it would make the credit fully refundable. A temporary version of this credit was included in the ARPA.
• Family Caregiving. The Biden tax plan would enact a new $5,000 tax credit to support costs incurred while caring for family members, including the elderly and those with disabilities or chronic health conditions.
• State Income Tax Deduction. The TCJA limited the itemized deduction for state and local taxes to $10,000. The Biden tax plan would support the House-passed HEROES Act provision to remove this cap.
• Student Loan Forgiveness. Biden’s plan proposes that student loans would be forgiven, tax-free, after borrowers have been enrolled in the income-based repayment plan for 20 years.
• First-time Homebuyer. The Biden tax plan calls for creating a new refundable, advanceable tax credit of up to $15,000 to assist with buying a first home. The credit would be paid upon the purchase of the home and not when filing the tax return. Additional housing credits are also being considered, including credits for rehabilitating distressed properties and limiting rent and utilities for low-income households that qualify.
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