President Biden’s Tax Proposals - What’s In It For YOU?
Much has been written (and said) about President Biden’s proposed tax changes, mainly affecting those with incomes over $400,000. But, what of this policy, would affect the average middle class American household, presumably you and I? The answer is plenty, particularly if you take care of a family member, are a first time home buyer, or contribute to an employer retirement plan. Most of what is being proposed is an update to a tax credit or a new credit for those making $400,000 or less. Keep in mind that nothing has been passed by Congress as of this writing, but key parts are likely to go through with a Democratic-controlled House and a 50/50 Senate split with Vice President Kamala Harris as the tie-breaker.
You have probably heard Ben Franklin’s quote, “… nothing can be said to be certain except death and taxes.” And I would perhaps add in parentheses “and changes to tax policy.” With every new administration, there is a chance that tax law could be modified and sometimes even completely overhauled. Will your taxes go up or will they go down? Democrats and Republicans have vastly different views on our tax code from both an individual and a business perspective. But, let’s dive deeper into the individual side and review some key tax proposals and changes that are being discussed from within the Biden Administration.
Having Kids Pays Off
The Child Tax Credit is probably the most popular credit and many families take advantage of it each year. Let’s face it: kids are not cheap. Biden is proposing that this credit be fully refundable and increased to $3,000 for each child aged 6 to 17 and up to $3,600 for each child under age 6. This credit is currently maxed out at $2,000 no matter the age(s) with $1,400 being refundable (you receive money back even if your tax liability is $0). The same income levels would apply, which means the credit would be fully available to single taxpayers with MAGI (modified adjusted gross income) of $200,000 or less and those who are married filing joint with MAGI of $400,000 or less.
The Dependent Care Credit, which allows you to claim provider care expenses (e.g., nanny) for a child under age 13 or an adult who lives with you (e.g., disabled spouse, elderly relative), would be increased to $8,000 for one qualifying individual and a maximum of $16,000 for a family. It is currently limited to $3,000 for one individual or $6,000 if there are multiple family members. Also, up to half of the spending on care would be available for you to deduct (based on income), rather than the current 35%.
If You are Taking Care of a Distant Family Member
A brand-new Family Caregiving Credit is being considered that would provide a $5,000 credit for those who are taking care of a distant elderly or disabled family member or if the member has a chronic health condition. This is meant to offset some of the costs for those who travel to and provide care for a loved one.
A Good Time to Buy Your First Home?
President Biden wants to bring back the First-Time Home Buyer Credit that President Obama put into place amid the housing crisis in 2008 and 2009, but with some key changes. First, he wants to increase it from $8,000 to $15,000. And instead of waiting to receive your credit when you file your taxes, it would provide up to $15,000 at the closing table giving potential first time homebuyers an incentive to make the leap into home ownership.
Big Changes to Your 401k, 403b, or 457b
If your employer currently offers a pre-tax retirement savings plan, such as a 401k, 403b, or 457b, each dollar you contribute reduces your taxable income by that amount. Biden is proposing that instead, everyone receives a 26% credit on the amount they contribute. For example, if you contributed $10,000, you would get a credit of $2,600 (26% of $10,000). Under the current system, your tax bracket determines your savings (the higher the taxable income/bracket, the higher the savings and vice versa). This would essentially put everyone on the same playing field with a flat 26% cap. Also under consideration is requiring employers to offer and auto enroll employees in 401k’s or similar plans.
As I stated earlier, these proposals are still on the table and so far, no timeframe as to when they might be passed, if at all. However, Biden does have a majority on his side in Congress so these credits could easily come to fruition. Tax planning is very important and could save you thousands over your lifetime. You should review your situation at the beginning of each year to determine if any planning opportunities exist. If you are more comfortable getting help, consult with a licensed tax professional to see what, if any, tax deductions and credits are available to you now and what you might need to consider in anticipation of future tax law changes. For more specifics around some of the credits mentioned as written today, please refer to the IRS web site: www.irs.gov.