In 2019, Americans reported $11.9 trillion in adjusted gross income and paid $1.6 trillion in income taxes. But these taxes are not paid equally by all citizens. The U.S. has a progressive tax system, where higher earners are expected to pay higher income tax rates. Under President Biden’s new tax plan, high earners and business owners could see their tax rates rise.
It’s important to understand that these higher taxes will be difficult for the President to pass, especially with mid-term elections later this year. However, if the tax increases are passed, they could impact your budget and your financial plan – especially if you are a high earner or a business owner. With the threat of higher tax rates, it is more important than ever to have a plan for dampening the impact of taxes on your investments and income.
Biden’s New Tax Plan Would Implement a Billionaire Minimum Income Tax
In a typical year, American billionaires pay an average of 8% of their total income in taxes. Under President Biden’s new tax proposal, these families would owe a minimum of 20% of their total income, including unrealized gains, in taxes each year. While the proposed legislation is primarily targeted at billionaires, the minimum tax would apply to all households worth more than $100 million.
This new tax plan is a significant deviation from current tax law. Under the current laws, gains on investments and real estate are only taxed when the property is sold. This is referred to as a realized gain. However, many extremely wealthy households are able to let their assets accumulate for years or even generations without paying tax on those gains. The new tax law would tax unrealized gains as well as realized gains for the country’s wealthiest households.
This new tax plan would only apply to the top 0.01% of Americans and the White House estimates that this new tax would increase revenue by $360 billion over a decade. Additionally, the billionaire tax would not impose any new taxes on households worth over $100 million that already pay at least 20% in income tax.
President Biden proposed a similar provision as a funding option for his domestic spending bill last October, but the proposal failed to gain the necessary traction. It is unlikely that the tax will be passed this time for several reasons. First, many lawmakers are hesitant to raise taxes, even on such a small percentage of the population. Additionally, some argue that unrealized appreciation is not technically income, and therefore should not be taxed. There is concern that the supreme court could side with those that share this opinion.
Enforcing a new type of tax like the proposal outlines would require tremendous effort on the part of the IRS. They would need to value assets and ensure that those subject to the tax pay the required amount. In Europe, lawmakers have abandoned similar tax strategies over the burden that enforcing them creates. For these reasons, it is unlikely that President Biden will be able to bring this aspect of the new tax plan to fruition.
Biden’s New Tax Plan Would Raise Corporate Tax Rates
In addition to raising revenue through the billionaire tax, President Biden suggests increasing corporate tax rates under his new tax plan. Currently, corporations pay a 21% tax rate. Under the new plan, the corporate tax would increase to 28%.
By increasing the corporate tax rate, the President hopes to increase the share of federal revenue that comes from corporate taxes. Prior to the 2017 Tax Cuts and Jobs Act, corporations paid 35% tax. In 2017, the last year at the 35% rate, corporate taxes accounted for 9% of total federal revenue. In 2019, after the corporate tax rate was cut to 21%, corporate taxes accounted for 6.6% of total federal revenue. The new tax plan could increase the share of taxes paid by corporations and bring it closer the previous level.
Like the billionaire tax, these tax increases may be difficult for the President to pass, particularly with midterm elections in 2022. It is important to keep in mind that these tax increases would not apply to small businesses that receive pass-through income, like LLCs, S-corps, and sole proprietorships.
Biden’s New Tax Plan Would Increase Tax Rates for Top Earners
For many investors, the billionaire and corporate tax increases would have little impact on their personal tax situation. However, the President has also recommended increasing the top personal tax rate, which could impact high earners.
Since the Tax Cuts and Jobs Act of 2017, the top personal income tax rate has been 37%. In 2022, that rate applies to individuals with income greater than $539,900 and married couples with income greater than $647,850. Under the new tax plan, the highest income tax rate would revert to 39.6%. Additionally, the threshold for the top tax bracket would decrease to $400,000 for individuals and $450,000 for married couples filing jointly.
How These Tax Increases Could Impact You
Higher taxes can weigh on your budget and negatively impact the economy as a whole. Estimates show that increasing the corporate tax rate to 28% could reduce GDP by $720 billion over the next 10 years. On the other hand, the corporate tax increase would add about $694 billion in additional tax revenue over that timeframe. These estimates also indicate that the increase in the corporate tax rate would cost about 138,000 jobs in the long run.
These economic outcomes could have spillover effects for your investments. When companies pay more in tax, it can reduce their profit margins, and therefore their stock prices. In addition, a weaker economy can lead to fewer jobs and opportunities which can negatively impact your income.
If you are a high earner, an increase in the personal income tax rate could mean that you have less disposable income and less money to put toward your savings goals. Additionally, higher taxes during your retirement years could mean that you need more savings to fund the lifestyle you planned.
As previously stated, these tax increases will likely face significant opposition and could be difficult for the President to pass. However, it is important to have a plan in place in case one or more of these tax increases comes to fruition.
Tax Planning with Financial Fingerprint™ by Meld Financial
Tax planning is an important step in maximizing your retirement savings. That’s why Financial Fingerprint™ by Meld Financial takes taxes into account during your saving years and during your retirement. Financial Fingerprint™ is supported by an experienced team of tax, legal, and financial professionals that work together to craft financial plans that are designed to minimize your tax burden and optimize your returns while keeping risk at a palatable level.
Financial Fingerprint™ was developed by Meld during more than 30 years of managing our clients’ wealth. It is a comprehensive wealth management plan that is quick to assemble, easy to understand, and simple to modify as your circumstances change. It adjusts for changes in the tax code and helps you stay on the path toward reaching your financial goals. To get started with your Financial Fingerprint™, contact us today.