With the Democrats controlling both sides of Congress, the time has come to consider the tax law changes that may materialize in the near future. As a result of the pandemic’s gradual decline, these changes, if they pass, will be applied slowly; however, specific changes may come to fruition sooner than others depending on America’s priorities. It is too early to know for sure what the Democrats and President Joe Biden will officialize for tax and non-profit law, but potential changes could look something like this.
Changes to Long-term Capital Gains
Biden has stated a proposal for taxing long-term capital gains, or LTCGs, and qualified dividends by average income tax rates for taxpayers whose incomes surpass $1 million. If this were approved, affected taxpayers would contribute to a top federal tax rate on LTCGs that would come out to 43.4%, nearly double what it is now.
These effects would lead to removing preferred rates of qualified dividends and LTCGs of taxpayers whose incomes exceed $1 million. The national rate paid would increase from the remaining 3.8% net surtax. By repealing high-income earners’ preferred rate on LTCGs, the benefits of the initial rate would disappear.
A substantial consequence of this proposal is the loss of the three-year attributions of capital assets for the taxpayers capable of receiving these payments. These proposed changes are bad news for investors. Many are harvesting their gains and making use of interest payments before these changes occur.
Social Security (FICA) Tax Expansion
Talk of expanding the Social Security (FICA) tax for earnings that exceed $400,000 is stirring up mixed feelings over the 12.4% tax increase to self-employment income and Social Security wages within this range. Biden believes that his plan’s issuance addresses the solvency problem through added payroll tax contributions.
The philanthropic approach is that those who can afford to pay more in taxes should be doing so, and because this is the path that Biden is paving, Americans who resonate with these values are excited. Meanwhile, others are fearful of future liabilities. Some argue the current plan is a temporary fix, as it will only extend solvency until 2040. Implementing this change could generate a “donut hole” effect, as there would be zero payable Social Security tax on wages and self-employment income for incomes of $142,800-$400,000.
With all of these tax changes, there is no getting around the use of tax software. The effectiveness of tax preparation software for accountants, like ProSeries, is impossible to match with it being done manually.
Progressive Retirement Proposals
Retirees are looking towards a brighter future, as Biden’s plan focuses on moderately expanding the credit caregivers receive as compensation for work lost to 2020’s challenges. These changes would be beneficial to women who endure a gender gap in retirement.
Medicare Expansion Proposals
Biden plans to expand Medicare in response to research claiming that lowering the age of eligibility would bring about ten million Americans onto the Medicare rolls. Biden plans to reduce the age to sixty.
While this change would provide care to more people, it is still a change with complications. Biden is aware of the risks that making these changes creates for the financial aspects of Part A. To protect the finances, Biden has proposed the idea of financing through revenue instead of the payroll tax.
Stopping TCJA Loopholes
During his presidential campaign, Biden made it apparent that his intention regarding tax law reform would include rolling back aspects of the 2017 Tax Cuts and Jobs Act (TCJA) to end the unnecessary accumulations by businesses and individuals with high net-worth. Biden stated that he wants to raise the corporate tax standard by seven points, which would place the standard corporate rate within the pre-TCJA range.
Emphasizing Renewable Energy
Biden is promoting the use of renewable energy as both an environmental and an economic asset. He would like to expand renewable energy credits in tax as a means to rebuild the energy investment tax credit as well as the electric vehicle tax credit.
The Fine Print
Bipartisan disputes stunt political changes. Pushing tax reforms will require full House support from the Democrats to bring these proposals into law. Total support will also require that tax reform is high on the priority lists of representatives.
It is unclear at this point if a mutual agreement on the urgency of tax reform is consistent across the Democratic majority. The Republicans put up an intense fight for the TCJA, so Biden’s call for change will not go down without significant opposition from that front.
International Tax Reform
Biden seeks to impose tax breaks and penalties on international business. Buying American was emphasized in his 2020 campaign, and this emphasis may negatively impact overseas operations and transactions. Biden believes that by focusing on U.S manufacturing and promoting clean energy, economic growth will take place.
A party’s willingness to enact proposed changes comes down to individual priorities and how compatible these agendas are with the group. Representatives will have to think hard about what it is they want to see in tax law changes as a collective force. There are very few situations where equal representation manifests out of tax discrepancies.
Ultimately, Biden’s tax proposals may worsen the burden on corporate tax while pleasing most earners with tax breaks. Critics have argued that the emphasis on renewable energy and American-made manufacturing is more principle than political, but that does not mean that it won’t have the positive economic effect that Biden is envisioning.
The Non-Profit Wish-List Grows
Non-profit organizations are eager to begin working with Biden to resolve significant social issues dismissed under the Trump administration. Biden has stated that he will focus on climate change, the pandemic, racial justice, and the economy before anything else.
Even though Biden can only take on so much, the entire non-profit sector may benefit from increased donation and charity incentives, should Biden’s tax plan crumble. Biden’s tax plans limit the number of contributions by wealthy Americans. If the proposals fail, however, charitable efforts will remain as they have been.
The President intends to press the wealthy to pay their dues and requests that the nation as a whole learn to get comfortable with an economy run by gentler fuel and homemade goods. Change is always scary, but sometimes it’s everything you need. Here’s to a brighter tomorrow.
About the Guest Author
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.