What’s Included in President Biden’s Proposed Tax Overhaul?

President Biden’s “Build Back Better” policy initiative, which targets economic recovery, includes a $1.8 trillion American Families Plan (AFP) and a $2.3 trillion American Jobs Plan. The administration plans to fund both initiatives through a Made in America Tax Plan. Below is an overview of what’s included in this far-reaching tax overhaul.

American Jobs Plan

Estimated to cost around $2.3 trillion over the next eight years, this part of Biden’s “Build Back Better” initiative would consist of clean energy projects; affordable housing; the reconstruction or repair of 20,000 miles of road and 10,000 bridges; as well as funding for those who provide care for the elderly and disabled, and direct investment in rural and tribal areas by equipping them with 100% broadband coverage.

American Families Plan

Estimated to cost over $1.8 trillion over the next ten years, the American Families Plan would include universal preschool; two years of free community college; paid family and medical leave; extensions of the Child Tax Credit, the Earned Income Credit, and the Child and Dependent Care Credit. It would also extend certain provisions set forth in the Biden administration’s economic stimulus bill, the American Rescue Plan.

Funding for the American Families Plan would come through a series of tax increases on high-income Americans, including: increasing the top individual income tax rate from 37% to 39.6%; taxing unrealized capital gains above $1 million at death; and adjusting the threshold for the 3.8% Medicare tax to all income above $400,000.

Made in America Tax Plan

The administration plans to pay for these initiatives with a “Made in America Tax Plan” over the next 15 years. It is estimated that the tax reform plan will raise over $2 trillion over the next decade and a half by increasing various taxes on American corporations, including:

  • Raising the corporate tax rate from 21% to 28%
  • Increasing the global minimum tax that multinational corporations must pay to 21%. This is much higher than the 12.5% minimum rate recently discussed by the Organization for Economic Cooperation and Development (OECD).
  • Intensifying tax enforcement of U.S. corporations that invert (relocate operations overseas) or claim tax havens
  • Imposing a 15% minimum tax on book income reported to investors.

Individual Tax Rates

The Biden administration’s proposals on individual taxation are intended to avoid increasing taxpayers with annual incomes less than $400,000. The plan aims to increase the tax rate for the top income bracket from the current 37% to 39.6%. The top rate on capital gains would nearly double, increasing from 20% to 39.6%. Further, the current net investment income surtax of 3.8% levied on high-income taxpayers presumably would still apply. This means that the new top federal tax rate on capital gains would total 43.4%, nearly double the current law top combined rate of 23.8%.

 

 

Tax Breaks for Individuals Were Extended Under the Consolidated Appropriations Act, 2021

In late December of 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the Act), which included the long-anticipated pandemic-related Tax Relief Act of 2020. It also included the Taxpayer Certainty and Disaster Relief Act of 2020, which extends or makes permanent numerous tax provisions, including tax breaks for individuals. The following is an overview of these key tax-related provisions for individuals.

Medical Expense Deduction

The Tax Cuts and Jobs Act (TCJA) set the threshold for itemized medical expense deductions at 7.5% of Adjusted Gross Income (AGI), but this threshold was scheduled to return to 10% of AGI as set in the Affordable Care Act. However, the expense deduction had been extended perpetually by Congress, allowing a taxpayer to continue to deduct their total qualified unreimbursed medical expenses that exceed only 7.5% of their AGI. The Taxpayer Certainty and Disaster Relief Act of 2020 made this threshold permanent.

Charitable Contribution Deduction

Generally, charitable donations are tax-deductible only if you itemize your taxes, but the Coronavirus Aid, Relief, and Economic Security (CARES) Act incorporated a provision that authorized individuals who don’t itemize to deduct up to $300 ($600 for married couples filing jointly) in cash donations in 2020. The Taxpayer Certainty and Disaster Relief Act of 2020 extended this provision into 2021 and makes it more valuable for married couples filing jointly.

Taxpayers who do itemize their deductions are typically limited to a 60% cap (i.e., the amount of charitable donations you could deduct generally could not exceed 60% of your AGI). As in 2020, that limit has been suspended in 2021.

Mortgage Insurance Premium Deduction

The Taxpayer Certainty and Disaster Relief Act of 2020 includes a one-year extension of the mortgage insurance premium deduction, so premiums paid or accrued through December 31, 2021 can be deducted on tax returns by those who itemized deductions and otherwise qualify for the mortgage insurance premium deduction.

Exclusion for Canceled Mortgage Debt

Cancelled or forgiven debt by a commercial lender can be counted as income for tax purposes. However, the Mortgage Forgiveness Debt Relief Act of 2007 generally allowed for taxpayers to exclude canceled mortgage debt from their taxable income, but only for a finite number of years. The Taxpayer Certainty and Disaster Relief Act of 2020 extended the Mortgage Forgiveness Debt Relief Act of 2007 through 2025.

Residential Energy-Efficient Property Credit

Individuals who have implemented certain energy-efficient upgrades to their homes (i.e., solar electricity, solar water heaters, geothermal heat pumps, and small wind turbines) are eligible for the residential energy-efficient property credit. The credit had been set to phase out after 2021, but the Taxpayer Certainty and Disaster Relief Act of 2020 extended it as follows:

  • Continuing the rate applicable to 2020, eligible property that is put into service in 2022 will qualify for a credit worth up to 26% of the property cost
  • Eligible property that is put into service in 2023 will qualify for a credit worth up to 22% of the property cost.

 

Is Social Security Headed for Bankruptcy?

Beginning next year, for the first time in 39 years, Social Security is projected to dispense more money than it takes in, which means that the money being collected by the program will soon not be enough to cover the benefits being paid out. Does this mean that Social Security is going bankrupt?

How the Program Came to Be and How it Works

In 1935, after decades of American workers advocated for a social insurance program that could help support retired workers, President Franklin D. Roosevelt signed the Social Security Act into law. Social Security taxes were first collected in 1937 with payments to retired workers beginning in 1940.

A dedicated tax on earnings funds the Social Security program, and the collected money is disbursed as retirement benefits for retirees in the form of a monthly check. How much money a retired worker gets from the program is measured in “work credits”, which are based on total income earned during their career. The program also supplies survivor benefits in many cases to widowed spouses.

What Went Wrong?

Social Security was signed into law over 80 years ago, and there have been significant shifts in demographics since then. The baby-boom generation is retiring, tipping the scale on the worker-to-beneficiary ratio, but other contributing factors include:

  • growing income inequality
  • sizable decline in birth rates
  • legal immigration, which has been cut in half over the last two decades
  • Longer life expectancy as a result of modern medicine, which means people are collecting checks for more years than earlier generations

Is Bankruptcy in the Future for Social Security?

Rumors of the program’s impending bankruptcy have been circulating for years, and some people believe that Social Security funds are going to run out, leaving the workers who are paying into the system now without benefits. This is unlikely to be the case, but lawmakers rightfully continue to discuss proposals to Social Security legislation that would protect the program in coming years. While GOP lawmakers have expressed a desire to raise the minimum age at which you can begin to receive payments, Democrat lawmakers have proposed increasing the payroll tax that pays for Social Security. Neither plan is perfect. The GOP proposal would take years before any savings are realized, and the democrats’ plan to tax the rich would only put the program on borrowed time until it’s back in the same position. A bipartisan plan is needed for the future of Social Security, but how long it will take lawmakers to get there remains to be seen.

How the SECURE Act Made Employer-Sponsored 401(k) Plans More Accessible

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for employers on retirement plans, making it easier for employers to offer 401(k) plans and for employees to take part in them. Here’s how.

Multiple Employer Plans

Known as MEPs, multiple employer plans permit businesses to band together to offer employees a defined contribution plan such as a 401(k) or SIMPLE IRA, effectively allowing workers access to the same low-cost plans offered by large employers. While MEPs existed before the SECURE Act, here’s how they are now easier to establish and maintain.

  • The “one bad apple rule”, where one employer’s failure to comply jeopardized the entire plan, was done away with.
  • The “common nexus” requirement, which restricted the MEP option to small business employers who operated either in the same industry or same geographic location, was eliminated, permitting an “open MEP” that can be administered by a pooled plan provider (typically a financial services firm).
  • MEPs with fewer than 1,000 participants (and no more than 100 participants from a single employer) are excluded from a potentially expensive audit requirement.
  • Small business employers are also eligible for new tax credits for offering retirement savings options to employees.

Changes to Safe Harbor Plans

A provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans, which are 401(k) plans with an employer match that allows for avoidance of most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Flexibility offered by the SECURE Act includes:

  • Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
  • Removing the notice requirement for nonelective contributions. (The notice requirement is still applicable, however, for plans that implement the safe harbor match.)
  • Whereas pre-SECURE Act, switching to a safe harbor plan had to be done before the start of the plan year, employers are now allowed to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are approved if (1) a nonelective contribution of at least 4% of compensation is granted for all eligible employees for that year, and (2) the plan in amended by the close of the following plan year.

Automatic Enrollment Credit

The SECURE Act added an incentive for small businesses to feature automatic enrollment in their plans by allowing businesses with fewer than 100 employees to qualify for a $500 per year tax credit when they create a new plan that includes automatic enrollment. Business can also take advantage of this by converting an existing plan to one with an automatic enrollment. The tax credit is available for three years following the year the plan automatically begins enrolling participants.

Part-Time Employee Participation

Previously, employers could exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in January of 2021, the SECURE Act requires employers to include employees who work at least 500 hours in three consecutive years. This means that in order to qualify under this rule, employees would need to meet the 500-hour requirement for three years starting in 2021 in order to become eligible in 2024.

Choosing the Right Plan for Your Business

  • Research 401(k) plan options for your business, keeping in mind that retirement plans can be customized to meet the needs of you and your employees.
  • Carefully read through costs and fees of each plan. Recordkeeping fees, transaction fees, and investment fees are some to be mindful of, and these fees might increase if you add more employees and the plan grows (i.e. low-cost plans upfront might not be the best plan for your business in the long term.)
  • Look for a 401(k) plan that presents a variety of investment opportunities for employees in terms of stocks, bonds, broad-based international exposure, and emerging markets.

Work with a financial expert who can help you establish and oversee a 401(k) plan. These professionals can include third-party administrators, recordkeepers, and investment advisors and managers.

How to Keep Your Credit Score in Check During the Pandemic

The COVID-19 virus has spread unease and fear in 2020, and not just from a health standpoint. With millions of Americans out of work and small businesses forced to close shop due to the pandemic, financial fears have pushed front and center over the past few months. This article will address a common financial fear as of late: How to ride out this storm while keeping your credit score as stable as possible.

Check Credit Score Regularly

You should already be regularly monitoring your credit report during the best of times, but it’s especially important to do so during this tumultuous season in order to spot possible mistakes before they have a chance to negatively affect your credit score. Contact the creditor immediately if you do catch a mistake. Recent mistakes can typically be rectified with minimal headache while ones that sit on your credit report longer can take longer to get resolved. With COVID scams happening and many Americans’ income in flux, it’s good practice for the time being to check your credit reports monthly. In fact, the three national credit reporting agencies—Equifax, Experian, and Transunion—are offering free weekly credit reports until April of next year. You can access your reports at AnnualCreditReport.com.

Make On-Time Payments or Contact the Creditor

When possible, continue to make on-time payments, even if it’s just the minimum amount due, through the pandemic. A positive payment history is a major step in ensuring that your credit score stays the course. However, if your income has been affected and emergency savings accounts have been drained, this might not be possible. If this is the case, the best course of action is to contact the lender or creditor as soon as possible as they may have workable payment options available to help you get through this time. Proactive and early communication is paramount. Be prepared to discuss how much you can afford to pay and when you expect to resume regular payments.

Consider a Balance Transfer

You may have found over the past few months that you’ve needed to rely more on credit cards while simultaneously being unable to pay them off each month. If so, now might be a good time to explore a balance transfer where your debt would be transferred to a card that offers a lower interest rate on that balance and may reduce your monthly payment. The low-interest rates are typically temporary, but the payment reduction from lower-interest rate cards can at least help to keep your credit card debt from escalating out of control until you can get back on your feet.
Budget and Make a Plan / Prioritize Payments / Revisit Budget
This crisis is affecting almost everyone, whether you’ve lost your job, you’ve experienced a reduction in work hours, or you’re anxious about the economic fallout of the pandemic, so there’s no better time to rework your budget following these steps:

  • Assessing any take-home income.
  • Examine your financial commitments and variable spending
  • Determine where you can cut back, even temporarily

Taking steps to free up more money in your budget helps to decrease financial stress, which allows you to focus on the most necessary financial commitments while better positioning yourself to protect your credit. If needed, that money can be used for essential expenses, like food and bills, but if you’re in a better position, you can sock away some of it in an emergency savings account for future use.

What the Next Stimulus Package Could Look Like

As Congress begins working on a new coronavirus relief bill, the White House looks to target aid more specifically and cap the overall expense of the package at $1 trillion. Here’s what else we know about a second stimulus package.

Direct Stimulus Payment

Another round of stimulus checks could be coming to American households, but the amount is yet to be determined. While early talks of a second stimulus package were largely jobs focused, recent nationwide spikes of confirmed coronavirus cases have some states rolling back their reopening plans. The effect could be further layoffs for American workers and economic hardship for families, which increase the urgency for additional cash payments. However, the amounts and income thresholds could differ from the first round of stimulus checks, which were approved for individuals whose income was no greater than $75,000 and for married couples whose combined income was no greater than $150,000. Payments were phased out for incomes above those thresholds. It remains unclear at this point how Congress will move forward with this.

Changes to Unemployment Benefits

The CARES Act approved a weekly $600 bonus unemployment benefit to workers who’ve been laid off or furloughed as a result of COVID-19. This is in addition to state-provided unemployment benefits. However, this $600 weekly bonus is set to expire at the end of the month. Some lawmakers would like to see it extended while others would like unemployment benefits to be capped at no more than 100% of a worker’s compensation when employed. Though the additional unemployment benefit has proven to be a financial lifeline to workers who were suddenly laid off or furloughed, the risk is that it potentially incentivizes citizens to stay unemployed.

Back to Work Bonuses

Some lawmakers have put forth proposals for return-to-work bonuses. Such legislation could be an alternative to extending the enhanced unemployment bonus. So far talks of this bonus indicate a weekly $450 bonus for a limited time targeted at unemployed workers who return to work.

More Relief for Businesses

The CARES Act introduced the Paycheck Protection Program (PPP), which provided businesses that have been impacted by COVID-19 with forgivable loans. The second stimulus package could include an extension of the PPP, but some lawmakers would like to repurpose its unused funds for other kinds of assistance, which would be more clearly targeted at businesses that need the help. The White House also continues to advocate for tax breaks to promote new hires.

Liability Protection for Employers

The second stimulus package could see liability protections for employers who could possibly face lawsuits related to COVID-19, but any bill that permits sweeping immunity for employers will likely receive pushback from some lawmakers.

State and local aid, infrastructure spending, payroll tax cuts, and a tax credit for domestic travel are further probable points of discussion when Congress returns from recess.