The 2020 Presidential Election Results and Your Taxes
We have seen the 2020 Presidential Election in the news consistently for months! Americans chose sides based on their ethical beliefs. Is that the most important thing to base your vote on, the candidates view points on American jobs? Abortion? Supreme Court Nominees? I think all of these are very important but there is also another huge factor that I don't believe the American people are paying attention to, how this election will affect their taxes.
Social Media has dragged celebrities such as rapper 50 Cent, for his support of President Donald Trump because of his tax plan. Should a tax plan be enough to sway a vote? Well let's take a look and see what Joe Biden's tax plan consist of for the American people and why the wealthy are against it.
The top 5 things we'll look at are the individual tax rate, capital gains tax, deductions, and tax credits.
Individual Tax Rate
Currently the top marginal tax rate is 37% for income over $518,400 for individuals and $622,050 for married couples that file jointly. That rate is scheduled to increase to pre-Tax Cuts and Jobs Act of 2017 (TCJA) amounts after 2025.
Under the Biden Administration the top marginal tax rate would raise to the top marginal tax rate to the pre-TCJA rate of 39.6%. Not only will the rate go up but the income threshold for who gets taxed at that rate will go down to individuals with income over $400,000 vs $518,400.
The Biden campaign proposed removing the tax rate preference for capital gains and qualified dividends for income over $1 million by taxing them at ordinary rates. The Net Investment Income Tax (NIIT) will remain.
Currently the top tax rate for capital gains and qualified dividends is 20% for income over $441,450 for individuals and $496,600 for married couples that file jointly. In addition, there is a 3.8% NIIT. Taking that cap off and taxing those gains and dividends at the ordinary tax rate would significantly raise the tax bill of those it applies to.
Basic standard deduction for married couples filing jointly is $24,800 ($12,400 for single taxpayers or for married taxpayers filing separately, and $18,650 for heads of household). After 2025, the basic standard deduction is scheduled to revert to pre-TCJA amounts. The TCJA suspended the personal exemption and most individual deductions through 2025 and placed a $10,000 cap on the deduction for state and local taxes.
The Biden plan supports the provision in the House-passed Heroes Act that eliminates the cap on the deduction for state and local taxes for 2020 and 2021. Limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%. Taxpayers in tax brackets higher than 28% will have limited benefit of itemized deductions. Although it's important to note that now with the state and local tax cap of $10,000 everyone that itemizes is limited, not just those with itemized deductions over 28%.
Taxpayers will also notice a phase out of the 20% pass-through deduction for income over $400,000.
The Biden administration would also like to do some things that would affect us immediately, especially those of us that are parents. Beginning with the 2020 tax year, the child tax credit would increase from $2,000 to $3,000 ($3,600 for children under 6), make it refundable, and allow for advance payment of the credit.
They would also raise the child-care credit up to $16,000 for two or more children for taxpayers with income up to $125,000 per year. Expand the earned income tax credit to workers older than 65 who do not have a qualifying child. Enact a $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs. Enact a refundable, advanceable tax credit of up to $15,000 for first-time homebuyers. Enact a renter’s tax credit, designed to reduce rent and utilities to 30% of income for low-income taxpayers.
Under the TCJA the maximum child tax credit is $2,000. This amount is scheduled to revert to the pre-TCJA amount of $1,000 after 2025 if the Biden administration does not make changes. The maximum child- and dependent-care credit is $1,200. The Biden administration's proposal would make a huge difference for family's with children in child care.
Under current administration workers older than 65 who do not have a qualifying child are not eligible for the earned income tax credit. There is no tax credit for first-time homebuyers and no Federal tax credit for renters.
One of the major promises of the Biden campaign that drew millennials was the promise to forgive student loans. That promise is going to be taken a step further. Currently when any type of debt is forgiven it is taxable. The Biden campaign has said that they will have student loans that were forgiven excluded from taxable income. So not only will eligible graduates be free from their debt, they won't get a tax bill for that amount either.
These proposals will definitely bring big changes if the promises made are kept. Many middle and lower class families will find relief as they are raising their children. Stress levels of college graduates with student loans piled up will be lowered, and the wealthy will have higher tax bills.
Where do you stand in the midst of all of this? What are your thoughts on the tax proposals of the Biden Administration? I'd love to hear from you! Don't forget to like and subscribe.
Timalyn S. Bowens EA is Louisville's Expert Tax Consultant and will work hard to find a legal solution that is customized for you!
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax & Bookkeeping Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with tax preparation, tax representation, tax planning, and more. Visit our website at www.bowenstaxsolutions.com for more information.