The new admin has been busy. Currently near the top of the agenda: passing a $3.5 trillion plan investing in child care, tackling climate change, and more. And that big price tag has people wondering, 'who’s going to pay for all this?' President Joe Biden has a few ideas – most of which include higher taxes for America’s highest earners. And in mid September, House Dems made some proposals of their own.
The deets that matter for your wallet: Let's break down some of the major 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% for higher-earning Americans (think: incomes of more than $400,000 a year, though exact dollar figures are TBD). That’s what it was prior to former President Donald Trump’s 2017 tax cuts. And the House Dems' plan calls for an additional surtax for Americans earning more than $5 million. The goal: raise $170 billion over the next decade.
Raising capital gains taxes. The latest proposals call for a top tax rate of 25% on capital gains, up from 20% now (but lower than the 39.6% Biden had proposed). Hint: 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 details.
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. Oh, and one more loophole that could get tightened: the estate tax exemption, which was doubled in 2017 to nearly $24 million for married couples until 2025. Dems are moving to retire that measure early, by EOY.
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 called for increasing the top corporate tax rate from 21% to 28%, but Dems are settling on 26.5%. PS: Here’s what that could mean for consumers and investors.
Negotiating expenses. Just like us, lawmakers can make room in the gov's budget by trying to lower their bills. One proposal: let Medicare negotiate drug prices with pharmaceutical companies. That could cut $700 billion from federal spending (and help lower drug costs for everyone).
Your move: While these plans are still TBD, there are a few things you can do to ready your wallet for any potential 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 planning to pay a little extra for everyday costs could be smart.
Don't make any sudden moves in your portfolio. 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.
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