During his first year as president, Donald Trump instituted the Tax Cuts and Jobs Act of 2017 — one of the most sweeping revisions to the Internal Revenue Code in more than 30 years.
The biggest changes for individuals under the updated tax code were increases to standard deductions and decreases to tax rates, which benefitted low- and mid-income Americans a little, and high-income Americans a lot.
Now that Joe Biden has taken the reins as commander in chief, more tax changes are on his to-do list — and they could impact how much tax you’ll pay in the near future.
With Democrats currently controlling both the Senate and the House, President Biden’s proposed tax revisions will have a solid chance of squeezing through even with staunch opposition from Republicans.
Here’s a breakdown of how President Biden’s tax plans could affect you.
Tax breaks for low- and middle-income Americans
A number of the president’s proposed tax changes will help to enhance or expand upon existing tax credits for low- and middle-income Americans.
President Biden plans to temporarily boost the maximum earned income tax credit for childless adults to around $1,500 and he plans to bring the income limit on the credit up to roughly $21,000. He has also said that he’ll eliminate the age cap for the credit so that working Americans over the age of 65 can claim it as well.
Adults with children would see the child tax credit temporarily increase from $2,000 per child to $3,000 per child within the age bracket of 6 to 17, and $3,600 per child for kids under 6. President Biden will also make the credit fully refundable and eliminate the current $2,500 minimum income requirement.
Additionally, the president plans to expand the child care credit to 50% of child care costs for kids younger than 13 — up to $4,000 for 1 child or $8,000 for two or more children. As with the child tax credit, the updated child care credit will be fully refundable.
Other possible tax benefits for low- and middle-income Americans under President Biden include a refundable and advanceable $15,000 credit for first-time homebuyers, an expansion of the work opportunity tax credit to include military spouses, and enhancements to tax breaks on 401(k) plans.
Although student loan forgiveness was not part of President Biden’s recent stimulus proposal, the president has publicly stated that he wants to provide student loan relief to every borrower and exclude the amount forgiven from taxation.
No official plans have been set, but the president recently expressed openness to the idea of using executive action to provide forgiveness for the millions of student loan borrowers still struggling with debt.
Tax hikes for high-income Americans
President Biden’s proposed tax revisions will likely not be a welcome change for high-income Americans — particularly those making $400,000 a year or more.
The president aims to limit itemized deductions for individuals earning more than $400,000 by capping the tax benefit of any itemized deductions at 28%.
He also plans to roll back Donald Trump’s reduction of the highest personal income rate (37% as of 2017) by returning it to the original rate of 39.6% for taxable income over $400,000.
Additionally, President Biden wants to tax long-term capital gains and qualified dividends at the same 39.6% rate for income over $1 million — a huge increase from the current maximum capital gains tax of 20%.
On top of that, the president supports eliminating the step-up basis for inherited capital gains, which means that anyone who inherits a capital asset will now be taxed on the gains accrued during the recipient’s lifetime.
The new tax plan will affect high-earning families as well: The child care credit of up to $8,000 mentioned above will gradually be phased out for families earning between $125,000 and $400,000.
More tax-free stimulus checks
The $1.9 trillion stimulus package that President Biden is hoping to push through in the coming weeks includes a new round of $1,400 stimulus checks in addition to the $600 payments that went out in late December.
The president is also hoping to provide an extra payment of up to $1,400 for each dependent. Unlike the first two stimulus checks, this would include dependents of any age, not just children aged 16 or younger.
Like the previous two relief payments, the third round of stimulus checks would be tax-free.
However, President Biden may decide to “target” this third round at low- and middle-income households that are most in need, which would mean a smaller relief payment for higher-earning Americans — or possibly none at all.
Filing your taxes this year
Regardless of how President Biden’s proposed tax revisions will affect you in the future, right now you’re likely focused on filing your taxes for 2020. After a two-week delay, tax season has finally arrived.
Filing your taxes is especially important this year, as it will allow you to collect any unclaimed stimulus check payments and will ensure that the IRS has your direct deposit information on file for when the next round of checks goes out.
These days doing your taxes on your own is easier than ever, thanks to the wide variety of free and low-cost tax software currently available. And if your return is going to be more complicated than usual due to the pandemic, many tax software providers also offer the option to have a certified tax professional review your return before you file it.
If you happen to get money back this year, think twice before parking it in your bank account — there are much better ways to maximize your tax refund, like investing it, putting it towards your retirement fund, or using it to buy a new car.
