The Democrats now control the House of Representatives, the Senate, and the presidency, so you might think President Joe Biden is going to get everything he wants on new policies like tax reform. He will not get everything he wants. The Democratic majorities in both houses of Congress are so slim that a loss of even one vote could keep any of his plans from passing.
Taxes have not been a big priority for Biden’s first few weeks in office anyway. While he’s issued many executive orders since taking office, none mentions taxes or contains any specific tax hikes or cuts. But there are still ways to figure out what Biden’s presidency might mean for your taxes.
Mind you, those proposals are just campaign promises. But they do show how he wants to change America’s tax policies, and plenty of other economic analysis out there shows what Joe Biden wants to do about taxes as president.
This one is no surprise. Democratic presidents tend to raise taxes on the wealthy, and Republican presidents tend to lower them. President Trump’s tax reform primarily benefited wealthy Americans, and similarly, Biden’s plans are likely to raise taxes primarily on wealthy Americans.
Under the Trump tax plan, the top tax rate on the highest earners was lowered to 37%. Biden’s plan calls for “raising the top individual income rate back to 39.6%.”
CNBC crunches the numbers and finds that those highest earners who will pay more in taxes under Biden’s plan are people who make more than $400,000 a year. That is consistent with Biden’s campaign pledge: “Nobody making under 400,000 bucks would have their taxes raised, period, bingo.” The Wall Street Journal notes that the tax would only apply to 1.8% of US households.
But taxes on a person’s annual salary is a very easy concept to understand—you make x amount of money that year, you pay y percent in taxes that year. There are other more complicated ways Biden intends to raise various forms of taxes.
Some people call it a “death tax,” other people call it the “Paris Hilton tax.” It’s technically called the estate tax, and it currently only applies to inheritances or other transfers of wealth of more than $11.7 million after one’s death. The estate tax rate is currently 40%, Biden would like to raise that tax to 45%.
The finance publication Kiplinger’s analysis of Biden’s tax plan points out Biden does intend to raise the corporate tax (the tax that corporations pay on their net profits). Biden wants to raise that corporate tax rate from its current 21% up to 28%. That’s still not as high as the corporate tax rate under President Obama (35%).
Most small businesses are not subject to the corporate tax—it only applies to incorporated businesses and not sole proprietors or partnerships. The National Federation of Independent Businesses estimates that “75% of small businesses are unincorporated pass-through entities, so owners report business income on their personal taxes.”
Biden also hopes to establish a 15% minimum corporate tax, so you might not hear any more of those stories about large corporations that “pay no federal taxes.”
It’s not all tax increases for big companies under Biden’s proposals. He’s proposed a 10% “Made in America” tax cut for companies that manufacture their goods and employ people here in the US instead of abroad. And Biden is proposing other tax cuts too.
Biden’s plan is not the stereotypical Democratic “tax and spend” program, and most American taxpayers would get a modest tax cut under it. An Urban Institute and Brookings Institution analysis found that households in the top 1% of income earners would see an average tax hike of about $260,000 a year under Biden’s campaign tax plan. But people earning between $50,000 and $89,000 a year would get an average tax cut of $680, and the lowest-earning households would see an average tax cut of $760.
Biden has pushed for expanded tax credits that would lower taxes on those without large inheritances or corporate profits to enjoy. Biden hopes to expand the child tax credit to $3,000 per child credit for children ages 6 to 17 and $3,600 for children under 6. His plan also hopes to give first-time homebuyers a refundable tax credit of $15,000, a credit that would be applied when you buy the home, not when you file your taxes.
Biden also wants to cancel $10,000 of federal student loan debt for those who still owe money, and the forgiven amount would not be taxed.
Of all Biden’s tax proposals, the one that would probably directly affect your small business the most is his proposal to create tax credits for small businesses that offer their employees retirement plans. You may want to check out our guide to creating retirement plans for small businesses if that tax credit does become a reality.
This is all just a crystal ball analysis. President Biden has not said much about tax policies since he was sworn in, as he’s been pretty focused on getting his COVID-19 relief package through Congress. Like most Americans right now, Biden is putting off doing taxes—but he’s going to have to get around to them eventually.