How Could Your Taxes Change in 2021?
How could your income taxes change in 2021? We’re still waiting on election results. But we can look ahead to the potential changes to your taxes if Joe Biden wins the election.
Watch Now: How Could Your Taxes Change in 2021?
3 How Could Your Taxes Change in 2021?
Subscribe Where You Find Your Podcasts
Here’s what we know about Mr. Biden’s tax plan.
Improving and Adding Certain Tax Credits
He wants to improve and add tax credits. His plan calls for:
- increasing the Child and Dependent Care tax credit. (this is for daycare costs)
- expanding the earned income tax credit for people over 65.
- renewable energy credits for electric vehicles and solar panels.
- restoring the first-time homebuyers tax credit.
- for 2021—and as long as economic conditions dictate—increasing the child tax credit.
Tax Credits for Retirement Savings
His plan also wants to equalize the tax benefits of retirement plan contributions. Right now, people get a deduction for some of those retirement plan contributions. He wants to change this to a tax credit.
What is the difference between a tax deduction and a tax credit? Which is better?
Tax Increases for High Earners and Corporations
Mr. Biden also wants to increase taxes for those people who make a lot of money. If you make over $400,000, you can expect a significant tax increase.
- your social security taxes will go up.
- The maximum tax rate that you pay on your income will also increase.
- If you are a business owner, you will lose the qualified business deduction.
- It will also tax capital gains and qualified dividends as ordinary income for those making over $1 million.
- It will also limit the benefits of itemized deductions.
He also wants to increase the taxes on businesses. The corporate tax rate under Mr. Biden’s proposal goes from 21% to 28%.
Lastly, he wants to restore federal estate taxes back to 2009 levels.
The Most Concerning Tax Change
There is something in Mr. Biden’s tax plan that will impact a lot of people. It involves how your cost basis is treated at a person’s death.
What is cost basis?
Your “cost basis” is what you pay for an asset. Whether you buy a house, a stock, a rental property or a bond, whatever you pay for that asset is your cost basis. If you add money to it, it increases your cost basis.
The cost basis is important when you sell that asset. You pay capital gains tax on the difference between the sale price and your cost basis. Let’s look at an example. Let’s say you buy a stock for $10,000. After several years, the value has grown to $50,000. If you sell that stock, you pay capital gains on the difference between the sale proceeds of $50,000 and your cost basis ($10,000). You would owe taxes on $40,000.
If you had reinvested the dividends from that stock, your cost basis increased. Let’s say you reinvested $5,000 of dividends, the cost basis increases to $15,000. If you sell the stock, you pay capital gains taxes on the difference between the $50,000 and $15,000.
Current Law vs What Could Change
Under current law, your cost basis steps up or steps down when you die. What Mr. Biden wants to do is eliminate the step-up in basis. Consider this. You paid $10,000 for your stock. It’s worth $50,000 at your death. Under current law, your heirs have a cost basis of $50,000.
Likewise, let’s say your parents bought a house several years ago for $50,000. When they die, the house is worth $200,000. Under current law, the basis increases to $200,000.
Under Mr. Biden’s proposal, there would be no step-up in basis. This means you would have a capital gain of $150,000 when you sold your parents house.
The other disturbing thing about Mr. Biden’s tax plan is the deemed sale at death. This means the tax code would treat a person’s assets as being sold at the date of death (rather than sold when the heirs want to sell them). It would make that capital gains tax due immediately.
Right now, most of those assets pass to others with little to no tax bill. Eliminating the step-up in basis will hit the wallets of many Americans.
Don't Worry Yet
About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.