President Joe Biden has been busy. Think: a $1.9 trillion stimulus package, a $2 trillion infrastructure plan, and a $1.8 trillion families plan. That all adds up to *checks math* a LOT of money.
So who’s going to pay for all this? The new admin has proposed a few ideas – all of which include higher taxes for America’s highest earners.
The deets that matter for your wallet: Let's break down some of the major tax proposals and what they mean for you and your money.
Increasing the top marginal tax rate. Biden’s American Families Plan would push the highest income tax bracket from 37% to 39.6%. (BTW that’s what it was prior to former President Donald Trump’s 2017 tax cuts.)
Raising capital gains taxes. The admin has proposed taxing long-term gains as ordinary income for Americans who earn at least $1 million a year. That hike, plus an additional surcharge, could more than double the current top tax rate from 20% to 43.4%. Psst...a capital gain is the profit you earn from selling an asset that increased in value. It's considered "long-term" if the asset was held for more than a year. We Skimm'd the deets here.
Eliminating tax loopholes. Specifically, the "step-up in basis" on inheritances. Currently, when an asset appreciates from its original cost basis (aka value), heirs don’t pay capital gains taxes on the difference in value when it gets handed down. Biden's update would tax unrealized gains of more than $1 million at the time of the owner's death. Exceptions: family-owned businesses and farms.
Cracking down on unpaid taxes. Biden is also looking to provide more funding for the IRS to chase down tax evaders. He says that could generate an additional $700 billion in revenue over the next decade.
Bumping up taxes on corporations. Biden’s infrastructure plan calls for an increase in the top corporate tax rate from 21% to 28%. PS: Here’s what that could mean for consumers and investors.
Your move: While these tax plans are still TBD, there are a few things you can do to ready your wallet for any potential tax-code changes.
Know if/how you’ll be affected and plan for it. If you fall into those top tax brackets that may get hit by hikes, see how you can mitigate the blow. One strategy: lower your adjusted gross income (hint: that’s your total income for the year minus certain deductions). You can do that by saving more money in tax-advantaged accounts (like a 401(k), IRA or HSA) and claiming all the credits and deductions you can (hello, student loan interest). Another idea: tax-loss harvesting. That's when you offset capital gains by selling losing investments within the same year. Losses for the win.
Prep your budget. If you think you’ll owe Uncle Sam more in the future, look for ways to cut regular costs. Then, put that money into a sinking fund to cover you come tax time. And even if you aren’t personally affected by these hikes, know that higher taxes for companies can be passed onto consumers (aka you) in the form of higher prices. So putting aside a little extra for everyday costs could be smart.
Close your eyes. Investors tend to get spooked by proposed tax hikes. And that can make markets go a little crazy. Best practice: wait out any market turbulence and focus on your long-term goals. Because acting impulsively to avoid short-term discomfort could cost you in the long run.
theSkimm: Biden’s big proposed spending plans could cost some Americans bigger tax bills. While lawmakers are working out the details, take this time to prep your wallet so you can be ready for whatever happens next.
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Skimm'd by: Ivana Pino, Stacy Rapacon, Casey Bond, and Elyse Steinhaus