Taxes will likely rise for wealthy regardless of President Biden’s plans

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President Joe Biden plans to levy taxes on wealthy households to fund part of his infrastructure agenda.

But some of these tax hikes are imminent, even if Biden’s legislative push is unsuccessful. This is due to the way lawmakers structured the Tax Cuts and Jobs Act of 2017.

This law largely lowered taxes for private individuals – for example, by lowering the highest income tax rate and exempting more estates from tax. According to the tax foundation, the benefits largely amounted to the top 1%.

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However, the tax regulations for natural persons should expire after 2025 and fall back on the previous law. That means that without Congress, taxes on the wealthy intervention would likely go up. (The statutory reduction in the corporate tax rate from 35% to 21% is permanent.)

“That will happen if everything stays as planned,” said Paul Auslander, certified financial planner and director of financial planning at ProVise Management Group, based in Clearwater, Florida, of the reversal.

Expiry of tax cuts

In 2026, the highest marginal tax rate would rise to 39.6% from its current 37% – one of Biden’s infrastructure-related policy proposals.

Additionally, individual taxpayer rebates that exceed about $ 5.5 million to $ 6 million would be subject to federal tax – about half the current threshold. A reduction in the alternative minimum tax would expire, as would a new tax deduction of 20% for pass-through companies. Doubling the child tax credit to $ 2,000 per child would also be forfeited.

The top 1% saw the greatest growth in after-tax income due to the Law on Tax Cuts and Employment, according to the Tax Foundation.

According to the analysis, their income increased by an average of 3.8% in 2018. Those in the bottom fifth saw a 0.8% increase this year.

Biden tax plan

Senate Minority Chairman Mitch McConnell, R-Ky., Said last week that the withdrawal of 2017 tax cuts to fund Biden’s infrastructure agenda was a “red line”.

Biden’s American Families Plan aims to raise $ 1.5 trillion over a decade through higher taxes on the top 1%. The proceeds would fund initiatives such as advanced education, childcare and paid vacation, which Democrats say are a factor in US infrastructure.

The plan would raise the top tax rate to 39.6%. It would also roughly double the tax rate millionaires pay on valued stocks and other assets – known as capital gains tax. It would also impose a capital gains tax on certain capital transfers upon death.

Two-thirds of taxpayers in the top 1% would raise their taxes on the Biden proposal, according to the Institute for Taxes and Economic Policy. (This group has an average income of $ 2.2 million, according to analysis.)

Biden’s plan is facing headwinds in Congress.

If this does not succeed, the income after tax for the top 1% will decrease by an average of 0.1% due to the expiry of the provisions of the law on tax cuts and employment, according to the tax foundation.

The rich aren’t the only ones who would see a tax hike – all income groups would see their after-tax income drop by a similar rate due to the expiring regulations.

And not all expiring regulations would necessarily raise taxes on the rich. For example, a US $ 10,000 limit on state and local tax withholding would also be removed.

Some tax experts believe that Congress may extend the temporary tax breaks.

“Politicians generally want to extend tax cuts,” said Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. “Once you have a tax cut in place, it’s difficult not to keep it permanently.”

Financial planning

Tax uncertainty makes big financial planning decisions difficult – and individuals shouldn’t take jerky steps believing it could happen, according to financial advisors.

This is especially true for irreversible transactions like the sale of a company that an owner wanted to keep for the long term in order to avoid a potentially higher capital gains tax, said Auslander.

“It’s a moving target,” said foreigner about taxes. “I wouldn’t make too many long-term bets right now unless you plan on giving money away to children or donating money to charities.

“This is a slam dunk and makes sense no matter what.”

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