Democrats Have Control of Washington. What Does That Mean for Taxes?
Is an increase in taxes on the way?
Historically, Democrats are usually in favor of raising taxes, specifically for high-income earners. With President Biden now in office, the House of Representatives controlled by Democrats, and a split Senate, it's no surprise that many entrepreneurs are wondering if Biden's big plans for taxes will come to fruition. Here's what tax changes are likely in store during the Biden presidency.
Understand the balance
To better understand what initiatives of President Biden's might get passed, it's important to understand the balance of power in Congress. While the House has a 10-person Democratic majority, the Senate is an even split and most tax bills require a 60% vote. This means that each individual legislator has the power to stop a bill from passing, so even though Democrats have control this doesn't guarantee that every initiative will be passed. In addition, any changes won't be immediate as Biden's focus is currently on another round of pandemic relief.
Most of the focus surrounding Biden's tax proposal was on rate increases for income, corporate and estate tax. Any significant increase in the estate or corporate tax rate is unlikely to pass as it won't create much new revenue unless President Biden and the Democrats feel a strong need to send a message and they can convince some of the moderate Republicans that it makes sense. An increase in income taxes seems a bit more likely. As it stands, Biden plans to increase the tax rate on annual income over $400,000 from a top rate of 37% to the old top rate of 39.6%. Knowing this in advance is an opportunity to revamp your current tax strategy. By understanding and utilizing the tax law, you can work with your CPA to reduce your taxable income to below $400,000 legally.
The tax law is well known to be a series of incentives for entrepreneurs and investors. While some incentives will remain the same under Biden's presidency, notably real estate and oil, there will be new opportunities in clean energy. In addition to supporting restoring the full $7,500 electric vehicle tax credit and enhancing incentives for carbon capture, use, and storage, his plan to rejoin the Paris Climate Agreement shows that he intends to focus on clean energy and climate control. Connect with your tax advisor to understand what incentives would work best in your tax strategy and how to maximize them.
Potential deduction for state taxes
One change that many haven't considered is a potential lifting of the limit on the deduction for state taxes. New Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi, both from high-tax states, have been pushing for state taxes to be deductible on federal returns. It's possible that with Democrats in control, this could become a reality. The challenge in getting this passed is the cost, especially since it primarily benefits high-income taxpayers.
Generally, taxes aren't going to decrease in the next few years, but the increases may not be as substantial as some believe. In this situation, the best offense is a good defense. An ongoing tax strategy that you continue to adjust and revisit often will be the key to reducing your taxes while Democrats have control of Washington.
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