Cyber Monday Sale! 50% Off All Access

Democrats Have Control of Washington. What Does That Mean for Taxes? Is an increase in taxes on the way?

By Tom Wheelwright Edited by Frances Dodds

Opinions expressed by Entrepreneur contributors are their own.

Tetra Images | Getty Images

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.

Rate increases

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.

Related: Do You Have to Pay Taxes on Your PPP Loan?

New incentives

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.

Related: Using Tax Preparer to File Taxes May Delay Your Coronavirus ...

Tom Wheelwright

Entrepreneur Leadership Network® Contributor

CPA, Author and Founder and CEO of WealthAbility

Tom Wheelwright is a leading tax and wealth expert, CPA and author of "Tax-Free Wealth." As the CEO of WealthAbility®, Wheelwright helps entrepreneurs and investors build wealth through practical strategies that permanently reduce taxes.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Business News

'Something Previously Impossible': New AI Makes 3D Worlds Out of a Single Image

The new technology allows viewers to explore two-dimensional images in 3D.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Business News

'I Stand By My Decisions': A CEO Is Going Viral For Firing Almost All of the Company's Employees — Here's Why

The Musicians Club CEO Baldvin Oddsson fired 99 workers at once over Slack for missing a morning meeting. But there's a catch.

Real Estate

Why Real Estate Should Be a Key Part of Your Wealth-Building Strategy in 2025 and Beyond

Real estate remains a strong choice for building wealth in 2025 and beyond, from its ability to generate passive income to offering long-term appreciation and acting as a hedge against inflation.

Fundraising

They Turned Down an Early Pay Day to Maintain Control of Their Business. And Then Went on to Raise $190 Million.

Jason Yeh, co-founder and General Partner of Patron, explains the early-stage venture firm's creation and future outlook.