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Although a U.S. president’s influence on the economy is limited, their tax plans affect Americans' personal finances. Given Biden's current lead in the polls and the possibility of Democrats gaining control of the Senate, his tax plan may eventually be passed by Congress. Regardless of your political views, it's not too soon to consider the possible implications for your own financial planning.
The Trump individual tax cuts are set to expire in 2025 unless extended by Congress. Not only is an extension doubtful, but the cuts may well be rolled back next year under a Democratic-controlled White House and Congress. That would increase all marginal tax rates, with the top marginal rate going back to 39.6%.
The Biden proposal includes a 12.4% Social Security payroll tax (split between the employee and employer) on any earned income over $400,000, with no cap. This would leave a "donut hole," with no Social Security payroll tax for wages between the current $137,700 cap and $400,000. This is a huge tax increase that would adversely hit small-business owners. When you combine the 39.6% federal rate and the 12.4% payroll tax, the effective top federal tax on earned income could be 52%. Add any state income tax, like California's 13.3%, and the top marginal rate for a small business owner could be over 65%.
The bad news for higher-income individuals doesn’t stop there. Biden also intends to eliminate capital gains for taxpayers who earn more than $1 million, effectively doubling the capital gains tax rate. Corporate income tax rates would rise from 21% to 28%, and minimum corporate taxes would be imposed.
If you own a small business, you may want to consider pushing earned income and capital gains into 2020 to take advantage of the current structure. This could save you a significant amount. For 2021 and beyond, the new tax code would encourage taxpayers to keep their salary under $400,000 and divert any additional cash flow into dividends, rent, or other non-earned income.
