So, let’s consider what may happen in the next two years or so…
I’m talking about the tax changes that will probably occur under the Biden Administration.

Note:  I’m not saying we should run and prepare for all these events- but they should be on our horizon, we should recognize how those changes could affect us- especially if our incomes are in the upper horizons.

Top Tier Tax Rates- Individuals and Corporate Entities

The one most discussed change is elevating the top tax rate back to 39.6% for those whose adjusted gross income is $ 400,000 and above. Now, the top tax rate is 37%, but at $ 400,000 the tax rate is only 35%, so a jump to almost 40% s a pretty large increase.

Of course, it’s never been made clear if that is the new threshold will apply only to those who are single- or will that the be income level that also applies to those who are MFJ (married filing jointly). I am guessing the $ 400K level is for singles, with $ 500K for married- but I have no inside scoop.  (Nor are their indications that this is a hard-and-fast threshold!)

Moreover, folks should recognize that there was a game applied with the Trump tax cuts. The reduction in tax rates was only temporary- and in 2026, the rates are already slated to return to 39.6%. So, the Biden changes will only make the changes occur 4 years earlier.

(Corporations are also going to be taxed at higher rates- at the bottom AND the top. The Biden Administration plans to raise the corporate tax rate to 28%, up from from the 21% stipulated by the Trump tax cuts. Moreover, an arrangement is being negotiated among the OECD (Organization for Economic and Cooperative Development) nations to impose a minimum tax rate of 12% or so, to stop corporations for seeking tax shelters around the world.)

Employment Tax Changes (not rates, but income level assessments)

A much larger effect on folks take-home pay (and corporate coffers) is a change in the Social Security taxes. Right now, folks (and corporations) only pay the 6.2% tax rate on the first $ 142,800 in wages. And, once that level is reached, no longer are wages subject to social security.

Biden plans to impose Social Security taxation on wages that exceed $ 400,000. Which means an additional 6.2% from both the employee and the employer will be collected- with no ceiling on wages earned. (This is in addition to the Medicare taxes of 2.9 to 3.8% that is already being collected on higher income earners.0

This will greatly affect how folks ensure that their pass-through businesses; these entities are required provide ‘reasonable compensation’ to its executives. (If the IRS determines a pass-through entity is NOT paying a reasonable wage, the IRS can [and does] impose employment taxes on all wages and dividends of the firm. That’s 15.3%, between the employee and employer portion.)

Unearned Income- capital gains and qualified dividends

The proposals are to tax capital gains and qualified dividends at conventional tax rates for those folks with adjusted gross income of $ 1 million or higher. Right now, those gains are taxes at 20%- with a potential net investment income tax of 3.8%, which means the effective tax rate is 23.8%. With this change, the tax collected would jump to 39.6%, and still also be subject to the 3.8% Medicaid surtax to boot. That’s an 80% increase in taxation.

Itemized deductions

The concept of itemized deduction under the Biden proposals is to cap the value at 28% of adjusted gross income. This means that for those at the top tax rates, the itemized deduction will no longer get a reduction in taxable income of 39.6%- but only 28%. That is another major increase in taxes collected.

In addition, President Biden is considering restoring the Pease limitations. (Note that the Pease limitations are really surtaxes imposed on higher income individuals.) These were repealed under the Trump tax cuts- which made those at the higher income levels have to compute how much of their itemized deductions were truly deductible. (Before the Trump tax cuts, the reduction in itemized deductions cut in for those folks earning $261,000 for single taxpayers, $ 287,650 for heads of households, and $ 313,800 for married couples.)

On the other hand, Biden is considering eradicating the SALT limitation. That is the imposition of a maximum deduction of $ 10,000 for state and local taxes for those who itemize deductions. In particular, this limitation affects those in New York, Massachusetts, New Jersey, Connecticut, California, and a few other states that provide more services to their residents than do Republican governed states.

Estate/gift taxes

It is fairly certain that the Biden Administration will return the estate tax exemptions back to the levels that obtained back in 2009. That means the estate tax exemption would be limited to $ 3.5 million and gift tax exemptions would be limited to $ 1 million. (They are both currently set above $ 11 million per person.)

I suggest we start paying more attention to what is on the horizon. Because if one is making $ 400K or more, it’s pretty clear that the tax situation could be very different in 2022.