So the big question is: Does more spending mean higher taxes?
It seems likely with a $2 trillion American Jobs Plan (that could eventually cost trillions more) on the table to bolster America’s crumbling infrastructure and invest in R&D.1
What could those tax hikes look like? Let’s consider the possibilities.
Although President Biden did commit to not raising taxes on folks earning less than $400,000 per year, it seems hard to believe that he’ll be able to keep that promise with such a massive bill to cover.2
Also, it looks like married folks filing jointly could find themselves facing a big "marriage penalty" if they get swept over the $400k threshold as a household.2
So what's on the table?
Well, one option is a new auto mileage tax, which would raise money for highway infrastructure. Another is higher fuel taxes, which could increase what Americans pay at the pump.3 However, both proposals would be difficult to get through Congress, so they seem unlikely to come to fruition.
And then you've got some economists who favor funding long-term infrastructure spending with ultra-long bonds and it is a possibility that Treasury Secretary Yellen will consider issuing 50-year bonds for the first time since 1911 to take advantage of low-interest rates.4
Bottom line: we don’t know exactly what will ultimately come out of all this Congressional haggling; BUT, it’s a smart move to prepare for potentially higher tax rates in 2022.
What could those look like? Your guess is as good as mine, but if I were a betting man, I'd say that some combination of the following seems quite possible:
- A higher top income tax rate
- A higher capital gains tax rate
- A higher corporate tax rate
- A lower estate tax exemption amount
We’ll know more as the final deal shakes out, but it's clear these possibilities make 2021 that much more critical for tax and estate planning.
In other tax news, the IRS has extended the deadline for making 2020 IRA and HSA contributions to May 17, giving folks an extra few weeks to get them in.5
Also, folks who already filed and paid taxes on 2020 unemployment benefits and are due money back under the recent rule change will automatically get refunds from the IRS, avoiding the need to file an amended return (unless they became newly eligible for additional credits or deductions).6
There’s a lot going on right now in Washington and we can’t know what the final resolution will be until all sides have their say.
However, it’s wise to remember that laws and circumstances change all the time. All we can do is stay on top of things and plan ahead as best we can.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.