It should come as no surprise that higher taxes are incoming- and if it does come as a surprise, then we’re sorry to break it to you!
President Joe Biden has been talking about tax increases ever since his campaign, and now it’s time to look at what that actually means, especially given his recent proposal call on Congress to enact tax hikes. Will these affect you and your family?
In short, it’s not likely, unless you’re incredibly wealthy. But if you’re just an average American then you don’t have to worry about these changes at all. Biden only plans on raising taxes for corporations and wealthy people, though some of the consequences may be surprising.
So, here are the 9 groups of people who have to watch out for higher taxes! If you count yourselves amongst them, leave a comment down below and let us know what you think about these changes.
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Many Real Estate Investors
Real estate investors need to watch out. Unveiled on April 28th, Biden’s American Families Plan proposal wishes to end the special real estate tax break. This tax break allows real estate investors to defer taxation when they exchange property, but only for gains greater than $500,000.
This sort of perk is beneficial for both individual real estate investors and corporations, but more so for the former because it allows them to roll the proceeds of sales into future purchases without paying capital gains taxes on profits. This means that the process can continue on forever- well, at least until the real estate investor’s death. When and if these assets are passed down to an heir, the tax bill is often wiped as well.
But what does this mean to small real estate investors? Not much, since the tax break won’t be wiped out for proceeds of less than $500,000.
People Earning More Than $400,000
FICA taxes, also known as payroll taxes, will increase for people earning more than $400,000 per year. Included in this are Social Security and Medicare taxes that are withheld from their paychecks in order to fund those programs.
People with a lower income have a 2.9% rate whereas those who earn above $400,000 generally have a 3.8%. The key word there is ‘generally’. Thanks to gaps in the law, Biden plans on making this more consistent, meaning that these individuals should start getting consistently taxed from this point onward.
What this means is that all high-income American taxpayers will pay the same Medicare taxes. But what about Social Security FICA taxes?
Biden also plans to make this more consistent because as of right now, there is a $142,800 earnings cap for those, so people who earn more than this do not pay Social Security FICA taxes on all of their income, but people with lower income do.
Individuals in the Highest Income Tax Bracket
When the Tax Cuts and Jobs Act of 2017 rolled around, it lowered the tax rate for people in the highest tax brackets. That means they went from 39.6% to 37%. President Joe Biden wants to roll things back to how they were before.
That’s why people who are heads of households with a taxable income above $523,600 and married couples who are filing jointly or surviving spouses with a taxable income above $628,300 have tax rates applied to them as of the 2021 tax year.
Are you among these groups of people? If not, then you shouldn’t worry.
Millionaires With Capital Gains
Another part of the American Families Plan proposal will affect individuals who earn more than $1 million. The proposal will make these investors pay the same tax rate on their capital gains as they do on ordinary income.
But what are capital gains? They are earnings from the sale of capital assets, meaning bonds, stocks and real estate, as mentioned earlier.
These are taxed differently from ordinary income wages.
For the most part, the tax rate for net capital gains sits at 15%, but some individuals may experience a tax rate of 20% or even 28%. Right now, the ordinary income tax rate is at 37%, but as mentioned in our previous category, Biden plans on rising that to
People Who Inherit More Than $1 Million in Capital
The “step-up in basis” applied to capital gains assets like real estate, bonds and stocks that are inherited. It reduces the capital gains tax liability on property passed to an heir. How? By excluding any appreciation in the property’s value and occurred during the decedent’s lifetime for taxation.
Biden’s American Families Plan wants to limit this “step-up in basis”, meaning the tax break would be disallowed for gains of more than $1 million per person, which were inherited.
It is due to this basis that billions of dollars in capital income has continued and continued to escape taxation entirely. However, we must point out that this isn’t the whole truth, since capital assets are bought with after-tax income.
It’s not just wealthy individuals that need to watch out for changes, but also corporations. Ever since his campaign, Biden has promised to raise taxes for corporations. Well, the American Jobs Plan proposal wishes to raise the corporate tax rate to 28%.
This move will not entirely undo the provision on corporate tax from the Tax Cuts and Jobs act of 2017, however. Back then, taxes were reduced from a minimum of 35% to a flat 21%.
Whether or not Biden plans to further change this rate later on remains to be seen.
Do you work for a corporation? How do you think your place of employment will react to these changes?
Some Gig Workers
While some of these changes are on their way towards implementation, the changes for gig workers have already started all across the U.S. The plan now requires gig economy platforms to report their payments of gig workers to the IRS if they earn at least $600. That means that now, companies such as Airbnb, Etsy, DoorDash, Uber and Taskrabbit no longer have to uphold the previous threshold of $20,000.
Gig workers should have reported their income to the IRS anyway, so this shouldn’t be seen as a tax increase. Those who haven’t been reporting their income are the ones who should be worried about these changes.
But this plan will definitely affect the revenue for the federal government, as the American Rescue Plan Act of 2021 will generate around
$8.4 billion in extra tax revenue in 2021 for this provision alone.
More on Gig Workers
A lot of gig workers are understandably displeased with this provision, but we must insist that this shouldn’t be seen as a tax increase for most workers.
If you are among the people that take up gig work regularly, whether you do so to supplement your income or are using gig work as a main source of income, then by law you were required to report your income to the IRS.
The IRS previously knew your income, if you did this, so there is no reason to worry about getting taxed higher. This permission mainly affects corporations, so you’re in the clear as far as higher taxation goes.
Stock, Bond, and Derivative Investors
Though this change will not come from the American Rescue Plan Act of 2021, it’ll still likely become law under Biden’s watch.
The Wall Street Tax Act was introduced in the House and January, and in the Senate in March. It stands to create a 0.1% tax on everyday sale of bonds, stocks and derivatives. What this aims to achieve is the discouragement of high-volume speculative trading, though the bill does not actually distinguish between types of traders. So, in the U.S., the 0.1% applies to any seller or buyer.
Should you start worrying? Not as of yet, since the bill has not seen an initial vote in either the House or the Senate.
‘Ultra-millionaires’ and Billionaires
Introduced in the Senate and the House in March, the Ultra-Millionaire Tax act seeks to increase individual income taxes. What this bill hopes to achieve is to introduce a 3% annual tax in the net worth of households and trusts of more than $1 billion and a 2% annual tax on the net worth of households and trusts between $50 million and $ billion.
We’ll let you do the math as to how much that would come down to.
Like the earlier bill, the The Ultra-Millionaire Tax Act hasn’t seen any initial votes in the Senate or the House just yet.
As you can see, there are many ways in which Biden plans on changing taxes around. But many people would have you believe that average Americans have a lot to lose once these plans come into effect.
As outlined today, you can see how you may not see an effect on your daily lives, unless of yours you’re the head of a massive corporation, are considered incredibly wealthy, or stand to inherit a huge amount of money from relatives.
How this will change the economical landscape of the U.S. isn’t 100% clear, and it’s likely that we won’t see overnight changes. But that doesn’t mean we don’t have to keep an eye out for changes going forward.
What do you think of these provisions? Let us know in the comments down below.