What People Earning Under and Over $ 400,000 Can Expect
United States President Joe Biden speaks in the East Room of the White House in Washington, DC on March 11, 2021, on the anniversary of the start of the Covid-19 pandemic.
Almond Ngan | AFP | Getty Images
With the latest coronavirus aid package, President Joe Biden could turn to another legislative priority this year: taxes.
Resetting how much Americans contribute to Uncle Sam could be high on the Democratic president’s list of priorities for this year.
Biden promised during his campaign that he would limit tax increases to people with incomes over $ 400,000.
“The president remains committed to his campaign promise that no one earning less than $ 400,000 a year will raise taxes,” White House press secretary Jen Psaki said this week.
She made it clear on Wednesday that the $ 400,000 threshold applies to families, not individuals. As a result, individuals earning $ 200,000 could be affected if, for example, they are married to someone earning the same amount.
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Biden’s tax plan will focus on ensuring businesses and high net worth individuals are paying their fair share, she said. However, a formal package has not been released.
New taxes for the rich could help pay for infrastructure and other priorities, said Shai Akabas, director of economic policy at the Bipartisan Policy Center. Whether Biden can deliver on that $ 400,000 pledge remains to be seen.
“He drew a pretty clear line during the campaign,” said Akabas. “I assume that he will at least stick to his original proposal.”
How tax changes could affect individuals
Biden’s plan is expected to increase corporate taxes, while those with higher incomes can expect higher payments as well.
His plan is to raise the top tax rate for those earning more than $ 400,000 from 37% to 39.6%.
He also wants to limit individual deductions to 28% for people earning above the same threshold.
Brian Gardner, chief Washington policy strategist at Stifel, recently rated both changes as “high”.
A less likely change this year, according to Gardner Biden’s proposal, would be to apply wage taxes to those who earn more than $ 400,000 to support Social Security.
Workers pay this tax on up to $ 142,800 of their wages in 2021. The change would create a so-called donut hole, with wages between $ 142,800 and $ 400,000 not being taxed. This gap would eventually be filled as social security wage tax increases every year.
To make that change, there would have to be a major discussion on social security, “which I doubt we’ll have this year,” Akabas said.
Certain other taxes targeting the rich are also high on the list of probabilities, according to Gardner.
This includes taxing capital gains as ordinary income – with a maximum rate of 39.6% – for those who earn more than $ 1 million per year.
Increasing the estate tax rate to 45% is also a good option.
Other twists that might appear in negotiations
Samuel Corum / Bloomberg via Getty Images
Many of Biden’s tax changes are intended to reverse some of the changes made in the Tax Cut and Employment Act passed in 2017 under former President Donald Trump.
One of the most controversial points in this package was the cap on the federal deduction on state and local taxes (known as SALT) to $ 10,000 per year.
However, restoring the full SALT trigger is likely to be a low priority, Gardner predicts. One reason for this is that this would be seen as a tax break for the rich.
A workaround would be to add tax credits that benefit lower-income taxpayers and pair them with additional taxes for high-income individuals. If that is the case, then it is “definitely possible” for such a change to be incorporated, Akabas said.
To be sure of what the final proposal will make up for depends on the method that Biden and Congress are using to push a bill.
The tax policy changes could go hand in hand with future infrastructure legislation, which is also at the top of Biden’s agenda this year. If so, new tax rules could be used to help pay for this initiative, Akabas said.
However, if a tax reform package is carried out separately, it could create room for other changes such as extending the extended child tax credit or earned income credit, which were temporarily introduced as part of the US bailout, he said.
“It is still a little unclear which of these routes you will be driving,” said Akabas.
As Biden’s proposal is formalized, experts will examine whether he can stick to his commitment not to levy taxes on anyone earning less than $ 400,000.
One step Biden could take to help those below that income threshold, according to Gardner, would be to extend the tax cuts Trump introduced. These should expire after 2025. Widening these tax cuts has a moderate likelihood, he predicts, but could help make other changes in the tax package politically more palatable.
Much will also depend on how the pieces of legislation fit together.
“If there is a negotiation, it could leave additional headroom for taxes, which could potentially affect a slightly wider segment of the population than just corporations or the top 2%,” Akabas said.