Since taking office, President Biden has unveiled his new tax plan, which helps to fund the Build Back Better Program. There are three plans in this agenda: the American Rescue Plan, the American Jobs Plan and the American Families Plan. Each of these plans will have different impacts on taxes. As the tax changes roll out, there are some key points to know:
The Build Back Better Program: Biden Tax Changes
The American Rescue Plan, which has already become law, is focused on repairing the damage caused by the COVID-19 pandemic. This plan has enacted temporary, emergency changes to help Americans rebuild.
It includes more generous individual tax credits, an extension to the earned income credit and premium reductions for the Affordable Care Act.
The proposed American Jobs Plan plans to increase income taxes on corporations to help rebuild U.S. infrastructure.
The American Families Plan, which is also still a proposal, aims in part to provide additional free schooling for American children, paid family and medical leave, nutrition programs and the 2021 extended individual tax credits.
The plan is for these programs to be funded by taxes, so if all of the plans become law, taxpayers will see some changes.
How Might the Build Back Better Program affect your finances?
According to these plans, corporations would see an increase in taxes. President Biden’s proposal includes raising the corporate tax rate from 21%, where it has been since 2018, to 28%. That’s a significant jump, but it’s lower than the 35% rate it had been from 1994 to 2017.
There would also be at least a 21% tax rate on corporations who operate in multiple countries, no deductions for offshoring jobs, and tax credits for on-shore expenses.
For individuals, you’re likely to see greater changes if you’re a high-income earner. For the top 1% of households in the U.S., Biden’s proposal would increase the tax rate from 37% to 39.6%.
The rate for long-term capital gains would jump from 20% to 39.6%, and when you add in the 3.8% investment income surtax for high earners, that rate is actually 43.4%.
These rates could vary by state, so if they are approved, be sure to check with your state to make sure you’re prepared for any major tax changes.
In New Hampshire, there is also the Interest and Dividends Tax. This is a 5% tax on interest and dividends income, but it does not apply to capital gains. You can read more about that tax here.
How should a high-income earner prepare?
Depending on which proposals become law, you might need to take different approaches to maximize your wealth and income.
For some people, particularly those whose income is at or close to $400,000 (for married filers, or $200k for single filers), it might make the most sense to switch back to pre-tax contributions. That would include accounts like 401(k)s and traditional IRAs. This strategy help you reduce your taxable income to potentially decrease your tax bill.
Additionally, take a look at your taxable accounts and see if it needs to be more tax efficient. That looks like lowering your dividends and interest within the portfolio. You could also switch to exchange traded funds (ETFs) to take advantage of their efficiency.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.