5 States With No State Sales Tax

Many people don’t factor in sales taxes when they’re looking at the tax-friendliness of different states. That’s a mistake. Forty-five states plus the District of Columbia impose a sales tax. In addition, local sales tax is collected in 38 states. The combined state and local levy can be hefty, too. In fact, in Tennessee (which took the top spot in our round-up of the 10 States With the Highest Sales Tax), the average combined state and local sales tax is 9.55%, according to the Tax Foundation. That’s a big bite out of your wallet every time you make a purchase.

On the flip side, for states that don’t impose a sales tax — Alaska, Delaware, Montana, New Hampshire and Oregon — residents are often hit hard with other taxes (like income or property taxes). Afterall, money for roads and schools has to come from somewhere. New Hampshire, for example, has some of the highest real estate taxes in the country. In Oregon, income tax rates can be as high as 9.9%, which is the fourth-highest top rate in the nation. 

The information below will help you understand more about what you will really pay to live in the five states with no sales tax. For each state, we’ve also included a link to our full guide to state taxes for middle-class families to help you put these shopping destinations in perspective.

Income tax brackets are 2020 values, unless otherwise noted. Property tax values are for 2019, the most recent data available.

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The state of Alaska.The state of Alaska.

Overall Rating for Middle-Class Families: Most tax-friendly

Sales Tax: While the Last Frontier has no state sales tax (or else it wouldn’t be on this list), localities can levy sales taxes, which can go as high as 7.5%. But, according to the Tax Foundation, the statewide average is only 1.76%. That’s the lowest combined average rate for states that impose either state or local sales taxes.

Income Tax Range: No state income tax.

Property Taxes: In Alaska, the median property tax rate is $1,182 per $100,000 of assessed home value, which is above the national average.

For details on other state taxes, see the Alaska State Tax Guide for Middle-Class Families.

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The state of Delaware.The state of Delaware.

Overall Rating for Middle-Class Families: Most tax-friendly

State Sales Tax: Delaware has no state or local sales taxes. It’s interesting to note that, in response, New Jersey halved its sales tax in Salem County, which borders Delaware.

Income Tax Range: Low: 2.2% (on taxable income from $2,001 to $5,000). High: 6.6% (on more than $60,000 of taxable income). The top rate is middle-of-the-road when compared to other states. Wilmington also imposes a city tax on wages.

Property Taxes: For Delaware homeowners, the median property tax rate is $562 per $100,000 of assessed home value — the lowest among the states featured on this list.

For details on other state taxes, see the Delaware State Tax Guide for Middle-Class Families.

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The state of Montana.The state of Montana.

Overall Rating for Middle-Class Families: Tax-friendly

State Sales Tax: No state sales tax, but some resort destinations such as Big Sky, Red Lodge and West Yellowstone have local sales taxes.

Income Tax Range: Low: 1% (on up to $3,100 of taxable income). High: 6.9% (on more than $18,700 of taxable income).

Starting in 2022, the top rate will be 6.75% on taxable income over $17,400. Then, beginning in 2024, the income tax rates and brackets will be substantially revised (there will only be two rates – 4.7% and 6.5%).

Property Taxes: For homeowners in Montana, the median property tax rate is $831 for every $100,000 of assessed home value. 

For details on other state taxes, see the Montana State Tax Guide for Middle-Class Families.

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New Hampshire

The state of New Hampshire.The state of New Hampshire.

Overall Rating for Middle-Class Families: Mixed tax picture

State Sales Tax: None.

Income Tax Range: New Hampshire doesn’t have an income tax. But there’s a 5% tax on dividends and interest in excess of $2,400 for individuals ($4,800 for joint filers).

Property Taxes: The median property tax rate in New Hampshire is $2,050 for every $100,000 of assessed home value. 

For details on other state taxes, see the New Hampshire State Tax Guide for Middle-Class Families.

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The state of Oregon.The state of Oregon.

Overall Rating for Middle-Class Families: Not tax-friendly

State Sales Tax: None.

Income Tax Range: Low: 4.75% (on up to $7,200 of taxable income for married joint filers and up to $3,600 for single filers). High: 9.9% (on more than $250,000 of taxable income for married joint filers and more than $125,000 for single filers). Dollar figures for 2020 are not available yet, so 2019 amounts are shown.

A “kicker” tax credit may be available on tax returns for odd-numbered years. The credit is authorized if actual state revenues exceed forecasted revenues by 2% or more over the two-year budget cycle.

Property Taxes: The median property tax rate for Oregon homeowners is $903 per $100,000 of assessed home value.

For details on other state taxes, see the Oregon State Tax Guide for Middle-Class Families.

Source: kiplinger.com

7 Ways Biden Plans to Tax the Rich (And Maybe Some Not-So-Rich People)

President Biden’s latest economic “Build Back Better” package – the $1.8 trillion American Families Plan – isn’t kind to America’s upper crust. It would provide a host of perks and freebies for low- and middle-income Americans, such as guaranteed family and medical leave, free preschool and community college, limits on child-care costs, extended tax breaks, and more. But to pay for all these goodies, the Biden plan also includes a long list of tax increases for the wealthiest Americans (and, perhaps, some people who aren’t rich).

Whether any of the president’s proposed tax increases ever make it into the tax code remains to be seen. Republicans in Congress will push back hard on the tax increases. And a handful of moderate Democrats will probably join them, too. So, don’t be surprised if a fair number of the plan’s revenue raisers are dropped or amended during the congressional sausage-making process…or even if some new tax boosts are added.

While we don’t know yet which – if any – of the proposed tax increases will survive and be enacted into law, wise taxpayers will start studying the plan now so that they’re prepared for the final results (any changes probably won’t take effect until next year). To get you going in that direction, here’s a list of the 7 ways the American Families Plan could raise taxes on the rich. But even if you’re not particularly wealthy, make sure you read closely to see if you might be caught up in any of the proposed tax hikes, since a few of them could snare some not-so-rich people in addition to the one-percenters.

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Increase the Top Income Tax Rate

picture of a calculator with buttons for adding or subtracting taxespicture of a calculator with buttons for adding or subtracting taxes

The 2017 tax reform law signed by former President Trump lowered the highest federal personal income tax rate from 39.6% to 37%. According to the White House, this rate reduction gave a married couple with $2 million of taxable income a tax cut of more than $36,400. President Biden wants to reverse the rate change and bring the top rate back up to 39.6%.

For 2021, the following taxpayers will fall within the current 37% tax bracket:

  • Single filers with taxable income over $523,600;
  • Married couples filing a joint return with taxable income over $628,300;
  • Married couples filing separate returns with taxable income over $314,150; and
  • Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

President Biden has said many times that he won’t raise taxes on anyone making less than $400,000 per year. But there have always been questions and a lack of clarity as to what this exactly means. For instance, does it apply to each individual or to each tax family? We still haven’t received a crystal-clear answer to that question. As a result, we’re not entirely sure if the president wants to adjust the starting point for the top-rate bracket to account for his $400,000 threshold. According to a report from Axios, an unnamed White House official said the 39.6% rate would only apply to single filers with taxable income over $452,700 and joint filers with taxable income exceeding $509,300. That would satisfy the president’s promise for single people, but it’s a bit trickier for married couples filing a joint return.

If the 39.6% rate kicks in on a joint return when taxable income surpasses $509,300, a married couple could end up being taxed at that rate even if both spouses earn well under $400,000 per year. For example, if Spouse A makes $270,000 and Spouse B makes $260,000, their combined income ($530,000) is over the $509,300 threshold. Using the 2021 tax brackets, they wouldn’t even make it into the 37% bracket (they’d be in the 35% bracket). So, each spouse would face a tax increase under the Biden plan, even though neither one of them earn over $400,000 per year.

To be fair, this type of “marriage penalty” exists for the current 37% tax bracket, since the minimum taxable income for joint filers is less than twice the minimum amount for single filers. However, the current brackets weren’t set up with a pledge not to raise taxes on anyone making less than $400,000 per year in the background. Perhaps the Biden administration will recognize this and eventually adjust the brackets to fix the marriage penalty issue.

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Raise the Capital Gains Tax

picture of computer screen with stock market charts showing market increasespicture of computer screen with stock market charts showing market increases

The American Families Plan also calls for an increase in the capital gains tax rate for people earning $1 million or more.

Currently, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year (i.e., long-term capital gains) are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is paid by wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. Gains from the sale of capital assets held for less than one year (i.e., short-term capital gains) are taxed at the ordinary income tax rates.

Under the Biden plan, anyone making more than $1 million per year would have to pay a 39.6% tax on long-term capital gains – which is almost double the current top rate. As noted above, that’s also the proposed top tax rate for ordinary income (e.g., wages). So, in effect, millionaires would completely lose the tax benefits of holding capital assets for more than one year. Plus, there’s the existing 3.8% surtax on net investment income, which would bump the overall tax rate up to 43.4% for people with income exceeding $1 million.

[Note: A summary of the American Families Plan states that application of the 3.8% surtax is “inconsistent across taxpayers due to holes in the law.” It then states that the president’s plan would apply the surtax “consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.” No further details are provided, but this could mean expanding the surtax to cover certain income from the active participation in S corporations and limited partnerships.]

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Eliminate Stepped-Up Basis on Inherited Property

picture of a last will and testamentpicture of a last will and testament

There’s another capital gains-related tax increase in the American Families Plan – eliminating the step up in basis allowed for inherited property. Under current law, if you inherit stock, real estate, or some other capital asset, your basis in the property is increased (“stepped up”) to its fair market value on the date that the person who previously owned it died. This increase in basis also means you can immediately sell the inherited property and avoid paying capital gains tax, because there’s technically no gain to tax. Why? Because gain is generally equal to the amount you receive from the sale minus your basis in the property. Assuming you sell the property for fair market value, the sales price will equal your basis…which results in zero gain (e.g., $1,000 – $1,000 = $0).

President Biden wants to change this result. Although details are scarce at this point, the president’s plan would nullify the effects of stepped-up basis for gains of $1 million or more ($2 million or more for a married couple) – perhaps by taxing the property as if it were sold upon death. There would be exceptions to the new rules for property donated to charity and family-owned businesses and farms that the heirs continue to operate. Other yet-to-be-determined exceptions could also be added, such as for property inherited by a spouse or transferred through a trust.

This is one of the tax changes that could impact Americans making less than $400,000 per year – perhaps only indirectly. Anyone, regardless of their own income level, can inherit property. If the heir’s basis is not adjusted upward any longer, that in essence is a tax increase on him or her. If the capital gains tax is levied before the property is transfer, that could mean there’s less to inherit – which could be considered an indirect tax on the person receiving the property. It can be a bit tricky, but there’s certainly the potential for someone inheriting property who makes less than $400,000 per year getting the short end of the stick because of this Biden proposal.

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Tax Carried Interest as Ordinary Income

picture of investment fund manager looking at several computer screenspicture of investment fund manager looking at several computer screens

In certain case, an investment fund manager can treat earned income as long-term capital gain. Known as the “carried interest” loophole, this lets the fund manager take advantage of the long-term capital gains tax rates, which are usually lower than the ordinary income tax rates he or she would otherwise have to pay on the income.

The American Families Plan calls for the elimination of the carried interest rules. The Biden administration sees this change as “an important structural change that is necessary to ensure that we have a tax code that treats all workers fairly.”

For a fund manager, this change would result in a potential tax increase on the affected income of up to 19.6%. For example, assuming the income is high enough, he or she could go from a rate of 23.8% (20% capital gain rate + 3.8% surtax on net investment income) to 43.4% (39.6% ordinary tax rate + 3.8% surtax on NII).

One would think that most, if not all, fund managers earn at least $400,000 per year. But if there are any of them out there making less than that amount, then this change could raise taxes on someone making less than Biden’s $400,000 per year threshold. Yeah, it’s not likely…but it’s theoretical possible.

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Curtail Like-Kind Exchanges

picture of several office buildings with a for sale sign in front of thempicture of several office buildings with a for sale sign in front of them

If you sell real property used for business or held as an investment and then turn around and buy other business or investment property that is the same type, you’re generally not required to recognize gain or loss for tax purposes under the “like-kind” exchange rules. Properties are of “like-kind” if they’re of the same nature or character. For example, an apartment building would generally be like-kind to another apartment building. This is true even if they differ in grade or quality.

The Biden plan would end this special real estate tax break for gains greater than $500,000. Since there are no income thresholds for the taxpayer, this change could potentially prevent someone making less than $400,000 per year (the $500,000 gain could be offset by other tax deductions, exemptions, or credits). Again, in most cases, wealthier people would be impacted by this change, but it’s possible that someone making less than $400,000 could also end up with a higher tax bill if this proposal became law.

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Extend Business Loss Limitation Rule

picture of worried businessman looking at bad financial statementspicture of worried businessman looking at bad financial statements

Under the 2017 tax reform law, individuals operating a trade or business can’t deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. The excess losses may, however, be carried forward to later tax years. This rule is currently set to expire in 2027 (it was also generally suspended by the CARES Act for the 2018 to 2020 tax years).

President Biden’s American Families Plan calls for this business loss limitation rule to be made permanent. According to the plan summary, 80% of the affected business loss deductions would go to people making over $1 million. But, once again, someone making less than $400,000 could also incur a large business loss that wouldn’t be deductible after 2026 if the Biden proposal is adopted.

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Increase Enforcement Activities

picture of yellow road sign saying "IRS Audit Ahead"picture of yellow road sign saying "IRS Audit Ahead"

Biden wants to increase tax enforcement activities aimed at high-income Americans – and give the IRS an extra $80 billion over a 10-year period to do it. While this really isn’t a tax increase, it certainly could result in wealthier Americans pay more in taxes. The idea is to “increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000.” The IRS would also focus resources on large corporations, other businesses, and estates. The audit rate for Americans making less than $400,000 per year wouldn’t increase under the president’s plan.

The American Families Plan summary also states that financial institutions would be required to “report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.” The income of wealthier Americans disproportionately comes from investments and small businesses, which are harder for the IRS to verify than other sources of income like wages. As a result, the Treasury Department estimates that up to 55% of taxes owed on some of these less visible income streams goes unpaid. And more of that unpaid tax is owed by people with higher incomes. The proposal would funnel additional information to the IRS about the hard-to-verify income without burdening taxpayers.

All-in-all, the White House claims that the increased tax enforcement efforts would raise $700 billion in revenue over a 10-year period.

Source: kiplinger.com

More Monthly Child Credit Payments, Higher Child Care Credit, and Other Tax Breaks in Biden’s Latest Plan

In March, the American Rescue Plan Act made several tax credits better. And, in one case, it requires the IRS to send monthly payments to families with children. However, the enhancements are only temporary – they only apply for the 2021 tax year.

The Biden administration sees those temporary improvements as simply a first step. So now President Biden wants to extend the expanded tax credits and continue supporting low- and middle-income families, as well as low-income workers without children, with tax reductions beyond this year.

That’s the goal of the tax-cutting provisions in the president’s American Families Plan. The $1.8 trillion package would also do many other things for ordinary Americans, such as providing universal pre-school, free community college, guaranteed family and medical leave, caps on child-care costs, and much more. All these – along with the extended tax credit enhancements – are designed to “build a stronger economy that does not leave anyone behind.”

It’s way too soon to tell if any of the tax credit extensions – or any other part of the American Families Plan – will make it through Congress and be signed into law. There will be stiff resistance from Republicans in Congress, and a few Democrats are likely to push back on some of the more costly items, too. Biden’s plan is just the starting point for further negotiations, so we’ll just have to wait and see how things progress from here. But in the meantime, we can take a look at the 4 tax credit enhancements that President Biden wants to extend. If you qualify, you’re already going to save a lot of money in 2021. If the extensions become law, you could pocket even more cash in 2022 and for years to come.

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Child Tax Credit

picture of a happy family at home on their sofapicture of a happy family at home on their sofa

For tax years before 2021, the child tax credit is worth $2,000 per dependent child 16 years old or younger. It begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Once your AGI surpasses $400,000 or $200,000, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Up to $1,400 of the child credit is refundable for some lower-income individuals with children. But you must also have at least $2,500 of earned income to get a refund.

Thanks to the American Rescue Plan, the 2021 credit amount is increased to $3,000 per child ($3,600 per child under age 6) for many families. Children who are 17 years old qualify for the credit, too. The credit is also fully refundable for 2021, and the $2,500 earnings floor is eliminated. In addition, the IRS will pay half of this year’s credit in advance by sending monthly payments to families from July to December 2021. (To see how much you’ll get, use Kiplinger’s 2021 Child Tax Credit Calculator.)

The new American Families Plan, if enacted, would generally extend the 2021 child tax credit enhancements through 2025 (including, presumably, the monthly payments). There would be one important difference, though. The new plan would make the credit full refundable on a permanent basis.

For more on the 2021 credit, see Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs.

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Child and Dependent Care Credit

picture of young children gathered around a preschool teacher who is reading a bookpicture of young children gathered around a preschool teacher who is reading a book

The American Rescue Plan also expanded the child and dependent care tax credit for 2021. This will boost tax refunds for many parents when they file their tax return next year.

For the 2020 tax year, if your children were younger than 13, you were eligible for a 20% to 35% non-refundable credit for up to $3,000 in childcare expenses for one kid or $6,000 for two or more. The percentage dropped as income exceeded $15,000.

The American Rescue Plan made several enhancements to the credit for the 2021 tax year. First, it made the credit refundable for the year. It also bumped the maximum credit percentage up from 35% to 50%. More childcare expenses are subject to the credit, too. Instead of up to $3,000 in childcare expenses for one child and $6,000 for two or more, the 2021 credit is allowed for up to $8,000 in expenses for one child and $16,000 for multiple children. When combined with the 50% maximum credit percentage, that puts the top credit for the 2021 tax year at $4,000 for families with just one child and $8,000 for families with more kids. The full credit will also be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase-out. However, all families making between $125,000 and $440,000 will receive at least a partial credit for 2021. (For more information, see Child Care Tax Credit Expanded for 2021.)

The American Families Plan would make these enhancements permanent. If it becomes law, parents paying for childcare will continue to see lower tax bills and/or higher refunds until their youngest kid turns 13.

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Earned Income Tax Credit

picture of a fry cook standing with arms folded in front of a grillpicture of a fry cook standing with arms folded in front of a grill

The earned income tax credit (EITC) provides an incentive for people to work. And, under the American Rescue Plan, more workers without qualifying children will qualify for the credit on their 2021 tax return and the “childless EITC” amounts will be higher.

For 2020 tax returns, the maximum EITC ranges from $538 to $6,660 depending on your income and how many children you have. However, there are income limits for the credit. For example, if you have no children, your 2020 earned income and adjusted gross income (AGI) must each be less than $15,820 for singles and $21,710 for joint filers. If you have three or more children and are married, though, your 2020 earned income and AGI can be as high as $56,844. If you don’t have a qualifying child, you must be between 25 and 64 years old at the end of the tax year to claim the EITC.

The American Rescue Plan expanded the 2021 EITC for childless workers in a few ways. First, it generally lowers the minimum age from 25 to 19 (except for certain full-time students). It also eliminates the maximum age limit (65), so older people without qualifying children can claim the 2021 credit, too. The maximum credit available for childless workers is also increased from $543 to $1,502 for the 2021 tax year. Expanded eligibility rules for former foster youth and homeless youth apply as well.

Under the just-released American Families Plan, the credit enhancements for childless workers will be made permanent. If enacted, the enhancements for workers without children would join other changes made by the American Rescue Plan that continue past 2021 to:

  • Allow workers to claim the EITC even if their children can’t satisfy the identification requirements;
  • Permit certain married but separated couples to claim the EITC on separate tax returns; and
  • Increase the limit on a worker’s investment income from $3,650 (for 2020) to $10,000 (adjusted for inflation after 2021).

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Premium Tax Credit

picture of a stethoscope laying on several one-hundred dollar bills picture of a stethoscope laying on several one-hundred dollar bills

The premium tax credit helps eligible Americans cover the premiums for health insurance purchased through an Obamacare exchange (e.g., HealthCare.gov). The American Rescue Plan enhanced the credit for 2021 and 2022 to lower premiums for people who buy coverage on their own. First, it increases the credit amount for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward the premium. It also allows the credit to be claimed by people with an income above 400% of the federal poverty line. According to the White House, these changes will save about 9 million families an average of $50 per person per month.

The American Families Plan would make these changes permanent to lower health insurance costs beyond 2022.

However, it’s not clear if the American Families Plan would extend the suspension of advance payment repayments. When you purchase insurance through the exchange, you can choose to have an estimated credit amount paid in advance to your insurance company so that less money comes out of your own pocket to pay your monthly premiums. Then, when you complete your tax return, you’ll calculate your credit and compare it to the advance payments. If the advance payments are greater than your actual allowable credit, the difference (subject to certain repayment caps) is subtracted from your refund or added to the tax you owe. If your allowable credit is more than the advance payments, you’ll get the difference back in the form of a larger refund or smaller tax bill. The American Rescue Plan suspended the repayment of excess advanced payments for the 2020 tax year. (If you already filed your 2020 tax return and repaid any excess advance payments, the IRS will automatically adjust your return and send you a refund if necessary.)

We suspect that the American Families Plan wouldn’t extend the repayment suspension. This, we believe, was and is intended to be a one-year-only rule to help people struggling during the COVID-19 pandemic.

Source: kiplinger.com

Does President Biden Want to Raise YOUR Taxes?

With good reason, some Americans are worried that their tax bill is going to shoot up in the near future. During last year’s campaign, President Biden wasn’t shy about telling the American public that he will raise taxes on the wealthy. And it looks like he’s about to release a new “social infrastructure” plan that’s expected to do just that. But what, exactly, does he mean by “wealthy”? The president has repeatedly said he won’t raise taxes on anyone making less than $400,000 per year. That appears to be a nice, clean, easy to understand dividing line between those who’ll pay more taxes and those who won’t. Unfortunately, though, it’s not that simple.

First, it’s not clear if the $400,000 threshold will be applied per individual or per family. If it applies to a family’s overall income, a lot more Americans are going to see their tax bill go up. Also, regardless of whether the threshold applies to an individual or a family, some Biden campaign proposals could increase taxes on Americans who don’t come close to earning $400,000 in a year. While the threshold would generally apply to income taxes and certain payroll taxes, the president has called for changes that would raise other taxes, too. People making less than $400,000 per year could get caught up in those other tax increases.

We also don’t know when any proposed tax increases would go into effect. The economy hasn’t fully recovered yet, and raising taxes on Americans before that happens (or close to it) could be risky. It will also be harder politically to boost taxes on individuals than it might be to increase taxes on corporations. As a result, we don’t think higher taxes will apply for the 2021 tax year. Instead, look for them to apply in 2022 or perhaps even later.

Having said all that, let’s take a look at some of the people who should be the most concerned about tax increases sometime during the Biden administration. Just remember that this isn’t necessarily an all-inclusive list – other people could also face higher taxes over the next few years. We’ll have a better idea of exactly who might see higher taxes soon once the president releases his “American Families Plan,” but his campaign proposals provide a good starting point for making predictions now.

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People Earning at Least $400,000

picture of a rich guy next to a private jetpicture of a rich guy next to a private jet

As we already mentioned, President Biden says he won’t raise taxes on anyone earning less than $400,000 per year. But, it seems, it’s open season for anyone making more than that amount. In fact, Biden has offered several tax proposals that would lighten the wallets of people earning $400,000 or more (again, we don’t know for sure if that means any individual or any family earning over $400,000).

First, the president wants to raise the top individual income tax rate from 37% to 39.6%. In other words, he wants to undo what former President Trump’s Tax Cuts and Jobs Act did back in 2017 (the TCJA temporarily lowered the top rate from 39.6% to 37% until 2026). For 2021, the following taxpayers will pay tax at the highest tax rate:

  • Single filers with taxable income over $523,600;
  • Joint filers with taxable income over $628,300;
  • Married couples filing separate returns with taxable income over $314,150; and
  • Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

It isn’t clear if Biden will also try to adjust the top-rate brackets so that they start at $400,000. If he does, that would result in a tax increase for single, joint, and head-of-household filers making between $400,000 and the current threshold amount. Currently, they’re not paying income tax at the top rate. If the threshold is moved up to $400,000 for married couples filing separate returns, that would result in a tax increase for people earning between $314,150 and $400,000, because they would be pushed into the highest bracket even though they aren’t there now.

The president has also talked about making wages above $400,000 subject to the 12.4% Social Security payroll tax (half paid by the employee; half paid by the employer). For 2021, wages above $142,800 aren’t subject to the tax (the amount is adjusted annually for inflation). However, instead of just imposing the tax on all wages, Biden may only want to add wages above $400,000 to the levy. That would create a “hole” in the tax – wages between $142,800 and $400,000 would not be taxed. The bottom threshold amount ($142,800 for 2021) would gradually increase through inflation adjustments, so the hole would eventually be filled, but that would take a long time to happen.

Small business owners earning $400,000 or more might also see a tax hike during the Biden administration by losing a valuable deduction. The TCJA added a 20% deduction for “qualified business income” from pass-through entities (e.g., partnerships, S corporations, and limited liability companies). The president has previously said he supports phasing out the QBI deduction for small business owners making more than $400,000 for the year.

TAX TIP: If you’re worried about higher taxes in 2022, consider moving some taxable income into 2021 if you expect to earn more than $400,000 next year. For instance, think about shifting money from a traditional IRA a Roth IRA in 2021. You’ll pay tax on the rollover amount now, but it’ll be taxed at 2021 rates instead of at whatever rate is imposed when you withdraw the funds in retirement. If you own a pass-through entity, see if you can shift QBI into 2021 to get the full 20% deduction. Also, see if your boss is willing to move some of your salary or bonus money into 2021 to drop your wages below the possible $400,000 Social Security tax threshold for 2022 – both you and your company could save money.

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Millionaire Investors

picture of investor looking at several computer screens and raising his arms up as if he has wonpicture of investor looking at several computer screens and raising his arms up as if he has won

Wealthy investors would be affected by any plan to do away with favorable tax rates on capital gains. Currently, gains from the sale of stocks, mutual funds, and other capital assets that you hold for at least one year are taxed at either a 0%, 15%, or 20% rate. Wealthier taxpayers – single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and joint filers with taxable income over $501,600 – end up paying the 20% rate.

However, don’t be surprised if President Biden’s American Families Plan requires anyone making more than $1 million per year to pay tax on long-term capital gains at the top income tax rate for ordinary income. That’s currently 37%, but don’t forget that the president also wants to kick that back up to 39.6%. So, millionaires could potentially see a 19.6% tax increase on capital gains.

And let’s not forget about the 3.8% surtax on net investment income (e.g., taxable interest, dividends, gains, passive rents, annuities, and royalties), which hits single taxpayers with a modified adjusted gross income over $200,000 and joint filers with a modified AGI over $250,000. Biden hasn’t suggested doing away with or otherwise modifying this extra tax, which means investors earning $1 million or more could actually see their tax rate on capital gains soar to 43.4%.

A Biden plan to reform the Opportunity Zone program could cost wealthy investors, too. Under the program, you can defer capital gains from the sale of business or personal property by investing the proceeds in qualified opportunity funds (QOF), which in turn invest in economically distressed communities. However, QOFs typically require investors to have a high net worth, a minimum annual income, and at least a six-figure investment. As a result, these investment vehicles, and the tax breaks that go with them, are mainly for the wealthy. Among other things, Biden said during last year’s campaign that he wants to make sure that Opportunity Zone tax benefits are only available if there are also clear economic, social, and environmental benefits for people living in the distressed communities.

TAX TIP: It might be time for millionaires to sell some of the stock or other capital assets they’ve been holding for a year or more, especially if they were going to sell soon anyway. If you’re worried about higher capital gains tax rates next year, realize gains in 2021 and take advantage of the favorable tax rates while you still can. Tax-loss harvesting (i.e., selling assets at a loss to offset capital gains) might also help reduce your tax burden.

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picture of tax form for reporting itemized deductionspicture of tax form for reporting itemized deductions

One of President Biden’s campaign proposals that never received a lot of attention is capping the value of itemized deductions at 28%. Generally, the plan is to reduce the total amount of itemized deductions for anyone paying a marginal tax rate above 28% – that is, taxpayers in the current 32%, 35% and 37% tax brackets, or the proposed 39.6% bracket. For example, instead of itemized deductions for the wealthiest taxpayers being worth 39.6% (assuming that’s the rate they’ll pay under Biden’s plan), that value would be capped at 28% and their itemized deductions would be reduced accordingly (similar to the itemized deduction limit that existed before the TCJA). In other words, instead of a wealthy person getting a 39.6% tax reduction for every dollar spent on, say, charitable gifts, he or she would only get a 28% tax reduction for every dollar donated to charity.

Note that the current 32% tax bracket applies to single taxpayers with taxable income as low as $164,926 and to joint filers with $329,851 of taxable income. As a result, limiting the value of itemized deductions to 28% could mean higher taxes for people earning less than $400,000. However, we could use some more clarity on this point. Unlike other income tax proposals offered during last year’s campaign, Biden never specifically said this itemized deduction limit would only apply to people earning $400,000 or more (although the Washington Post reported last August that an unidentified Biden campaign adviser said the $400,000 threshold would apply to the cap). The cap might fall under the general “no tax on people earning less than $400,000” mantra, but we’d sure like to hear that from President Biden himself if this proposal makes it into his American Families Plan.

There’s also another limit on itemized deductions that Biden talked about as a candidate. He wants to phase-out itemized deductions for people earning more than $400,000 for the year. Actually, this is simply a reversal of the TCJA’s repeal of the so-called “Pease limitation” (named after Congressman Don Pease (D-Ohio), who drafted the tax code provision establishing the limit.)

TAX TIP: Increase charitable donations in 2021 if you expect to be trapped by these potential itemize deduction limitations next year or beyond. Think about opening a donor-advised fund if you want to get your tax deduction now, but spread out donations to your favorite charities in the future. Also, before the year runs out, try to prepay deductible expenses, such as mortgage payments and state taxes due in January.

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Estates Over $5 million (and Their Heirs)

picture of fortune cookies with a fortune that says "death and taxes are the only certainties"picture of fortune cookies with a fortune that says "death and taxes are the only certainties"

President Biden has also set his sights on lowering the federal estate tax exemption, which would subject more estates to the tax. In 2017, any estate worth less than $5.49 million was exempt from tax. Thanks to the TCJA, the exemption amount for 2021 is now up to $11.7 million (although the higher amount is scheduled to expire in 2026). Biden has said he wants to bring the exemption back down – by a lot.

We think the president will try to set the exemption amount to the pre-TCJA levels (i.e., around $5.5 million when adjusted for inflation). However, don’t be surprised if he follow’s Sen. Bernie Sanders’ lead and asks for a reduction to $3.5 million (that’s what it was in 2009). Nevertheless, assuming the exemption amount is only brought down to the pre-TCJA amount, that still means estates worth about $5.5 million to almost $12 million would suddenly be hit with the federal estate tax. For those estates, it’s a tax increase – going from 0% in taxes to a 40% estate tax.

While this seems like a tax increase that only impacts the superrich, people of modest means can also be affected by the change. The estate tax is paid by the estate, not by your heirs. But that means that one or more of the beneficiaries are inheriting less than they otherwise would if no tax (or less tax) had to be paid. So, in effect, this tax increase is really an indirect tax on the people who inherit your property. And those people certainly could earn less than $400,000 annually.

TAX TIP: Giving away cash or property while you’re alive can help you reduce or even avoid estate taxes when you die. The general rule is that any gift is subject to the federal gift tax. However, there’s an important exception to this rule — you can give up to $15,000 per person during the year without having to pay any tax. If you’re married, your spouse can also give $15,000 to the same people, jacking the annual tax-free gift up to $30,000 per person. And you can do that year-after-year without paying any gift tax unless the total of all your non-exempt gifts exceeds the lifetime limit, which is the same as the estate tax exemption amount. Plus, as long as your gifts stay below the annual limits, whatever you give away won’t be counted for estate tax purposes when you die. So, for example, if the current value of your estate is above the federal estate tax exemption amount ($11.7 million for 2021), giving away assets now could drop the value below the exclusion amount, which would mean no federal estate tax when you pass away.

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Heirs Inheriting Capital Assets

picture of a piece of paper with "inheritance" written on it laying of fanned out one-hundred dollar billspicture of a piece of paper with "inheritance" written on it laying of fanned out one-hundred dollar bills

There’s another way your heirs could be screwed by one of President Biden’s expected tax proposals. He wants to eliminate the step-up in basis for inherited capital assets, which means more taxes on wealth passed to heirs.

Here’s how the step-up in basis lowers taxes: Johnny’s grandmother bought some stock years ago for $10,000. When she dies, Johnny inherited the stock – which is now worth $100,000. Johnny immediately sells the stock for $100,000. When you sell stock (or other capital assets), you pay tax on the gain – which is the amount you got when you sold the stock minus the “basis” (generally, the amount paid for the stock). In this case, Johnny’s gain would be $90,000 ($100,000 – $10,000). However, when you inherit a capital asset, the basis is increased (“stepped up”) to the fair market value of the asset on the date that the person who owned it died. So, in this case, Johnny’s basis in the stock automatically jumps up from $10,000 to $100,000, which means he has zero gain because the selling price and the basis are identical ($100,000 – $100,000 = $0). No gain = no tax for Johnny.

If the step-up in basis is eliminated, Johnny is going to be paying tax on $90,000 of capital gain. Assuming Johnny isn’t a millionaire (see above), at least he would still be able to take advantage of the favorable tax rates for capital gains since the gain from the sale of inherited assets is treated as long-term gain. But still, going from no tax to potentially paying a 15% or 20% tax is a tax increase for him. And, since Johnny’s salary doesn’t impact whether the stock basis is stepped-up or not, we can put this tax increase on the list of proposals that could hit people earning less than $400,000 per year.

TAX TIP: For certain people, a life insurance retirement plan (LIRP) might be something worth looking into if the step-up in basis for inherited assets goes away (or even if it doesn’t). As the name suggests, a LIRP is a cash value life insurance policy that can provide some of the same tax advantages as a Roth IRA, such as tax-deferred growth and tax-free income during your golden years. Since it’s a life insurance policy, a LIRP provides death benefits for your beneficiaries, too – and life insurance proceeds received by a beneficiary following the death of an insured person are generally tax-free. So, if you can’t pass tax-free capital assets to your children or grandchildren, listing them as a beneficiary on a LIRP might be a good alternative method of providing for them after you’re gone.

Source: kiplinger.com

First Time Homebuyer Tax Credit May Be Extended To All Homebuyers And Increased to $15,000 Through New Bill

The last few months have seen an increase in home sales to first time homebuyers, as well as a slight improvement in the real estate market as a whole.  A lot of people feel that this is largely due to the first time homebuyer tax credit that the Obama administration passed earlier this year. The measure, which was passed as a part of February’s stimulus package, gives first time homebuyers tax credits of up to $8000 when they buy their first home.  It certainly is an attractive offer if you’re looking for a home anyway – and we have several friends that have bought homes this summer because it was such a great deal.

A couple of weeks ago I wrote about how the time that was available to take advantage of the tax credit was quickly running out.  The credit is only applicable to home purchases that have been completed by December 1st, and since most home closings can take anywhere from 30-60 days,  if you haven’t already put in a purchase agreement on a house by now, you may be out of luck!

For a lot of people that is going to come as a big shock and a disappointment, but all hope is not gone!   Congress is already talking about extending the program, and possibly expanding it to all homeowners and increasing the credit to $15,000.  It is far from a done deal, but it is currently being debated by our legislators.

the National Association of Realtors wants to expand the tax credit to $15,000, and it wants to allow all buyers to be able to qualify, not just those who have been out of the market for three years, according to The New York Times. The $15,000 figure is actually the amount that the credit’s initial sponsor in Congress, Sen. Johnny Isakson, R-Ga., a former real estate agent, had wanted. Now Isakson is introducing a bill that would provide up to a $15,000 tax credit to any buyer who stays in their newly purchased home for a minimum of two years, according to the Times.

So Congress currently has bills that are being put forward that would extend the tax credit, increase it to $15,000 and allow all homebuyers (not just new homebuyers) to take advantage of the credit.  Whether this bill will pass is another matter.  It is currently up for debate, and the president is debating whether continuing it would be a good plan.

Asked about whether the Obama administration would consider extending the credit, White House spokesman Robert Gibbs said the administration’s economic team was evaluating the impact on new home sales and would make a recommendation to the president, according to the Associated Press.

The tax credit has been expensive, but it has arguably been successful in helping the ailing real estate and construction industries survive in recent months. However, like other supposedly temporary tax credits, the First-Time Homebuyer Tax Credit may end up being called the Perennial Homebuyer Tax Credit.

One of the biggest problems the bill faces is the price tag.  Estimates say that it could cost anywhere from $50 billion to $100 billion dollars.   Whether that is worth it right now is debatable.

Only time will tell if Washington will decide to continue the program.  If they do I can already hear all of the people complaining that they “only got $8,000”, or from others who want this credit to become permanent – not just a one-time deal.

UPDATE:  New First Time Homebuyer Tax Credit Bill Extension Introduced

A bill introduced last night after I wrote this post would now extend the tax credit for another 6 months, while not changing the the amount of the credit,  or who is qualified to receive the credit.  From housingwire.com:

A senate bill introduced late Thursday would extend the $8,000 first-time homebuyer tax credit for six months after its current November 30 expiration date.

Maryland Democrat Sen. Benjamin Cardin introduced S.B. 1678, and it is co-sponsored by senators John Ensign (R-Nev.), Johnny Isakson (R-Ga.), Senate majority leader Harry Reid (D-Nev.) and Debbie Stabenow (D-Migh.)…

The bill would not change anything on the tax credit except its expiration date, although at least one housing industry group is calling for an expansion of the credit and another, the National Association of Realtors (NAR), has urged an extension of the tax credit.

So if this were to particular bill were to pass, the tax credit would be extended, but not increased or changed to include all homebuyers.

UPDATE:  11/5/2009

Bill passed by Senate and House to extend the $8000 tax credit. Now only needs to be signed by the president.  Extends the bill to include a $6500 current owner homebuyer tax credit.

What do you think?  Should the tax credit for homebuyers be increased to $15,000 and be expanded to all homebuyers?  Will the effect it has on our economy be worth it, or will it just be another over-reaching expenditure of taxpayer money?  Would you rather they just extend the current program? Let us know your thoughts in the comments!

Source: biblemoneymatters.com

Lawmakers Push For An Extension Of The $8000 First Time Homebuyers Tax Credit Into 2010 In Proposed Bill

Since earlier this year we’ve been talking a lot about the $8000 first time homebuyer tax credit that was passed as a part of the 2009 Economic Stimulus Package. The credit has been available for first time homebuyers since January 1st, and will continue to be available until November 30th. Now that the program is beginning to wind down, the rumblings about trying to get the program extended or modified have begun. A few months ago there was talk about the tax credit being increased to $15,000, but that never got off the ground.  Another bill that was introduced last month also never got out of committee.  So while there is interest in passing an extension, nothing has come to fruition yet.

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In order to create hundreds of thousands of badly needed jobs and move the economy to higher ground, the National Association of Home Builders (NAHB) today called on Congress to extend and expand the $8,000 first-time home buyer tax credit set to expire at the end of next month.

Testifying before the Senate Banking Committee, NAHB Chief Economist David Crowe warned that builders are reporting that business generated by entry-level buyers is already declining because it is now too late to complete a new home sale in time to take advantage of the tax credit.

To spur job growth, help reduce foreclosures and excess housing inventories and stabilize home values, NAHB is calling on Congress to extend the home buyer tax credit for an additional year through Nov. 30, 2010 and make it available to all purchasers of a principal residence.

The drop in business seen by home builders is real.  The number of building permits for new homes dropped significantly in September

Applications for home building permits, a gauge of future construction, fell in September by the largest amount in five months — a discouraging sign for the housing industry.

The decline, in part, reflected uncertainty about whether Congress will extend a tax credit for first-time homebuyers.

The applications for building permits fell 1.2 percent in September. That’s the biggest decline since a 2.5 percent drop in April and underscored worries that the fledgling housing revival could be derailed by rising unemployment, tighter bank lending standards and the expiration on Nov. 30 of the government’s $8,000 tax credit for first-time homebuyers.

Is The Tax Credit A Good Idea? Some Think It Won’t Make Much Of A Difference

Many in the building and real estate industries are clamoring for an extension of the credit, while others aren’t so sure that the cost of extending the program are worth it.

Housing Secretary Shaun Donovan said at a congressional hearing Tuesday that supporting the housing market “can be very expensive, especially at a time of significant budget deficits.”

The administration will make a recommendation on whether to extend the credit in the coming weeks, after studying data on tax filings from the Internal Revenue Service. While there would be some negative effects if it were allowed to expire, Donovan said, “I do not believe that a catastrophic decline would be the result.

Some analysts and lawmakers are skeptical about extending the credit, arguing that most homebuyers who receive it would have decided to buy anyway. And soaring unemployment is likely to dull the impact of any extension, Mark Vitner, a senior economist with Wells Fargo Securities, wrote in a note to clients.

“Many of the most likely buyers targeted have already taken advantage of the program,” he wrote.

The Newest Tax Credit Bill Piggybacks On Unemployment Benefits

So there is clearly division as to whether the program should be extended.    Other bills to extend the credit and increase the amount it gives to homebuyers have already died a slow death in committee never to again see the light of day.    This week Congress is once again considering another plan that would extend the credit through June of 2010.  Whether this new one will make it out of the committees remains to be seen.

The latest Senate proposal would drop the requirement that the credit be available only to first-time buyers, broadening the reach of the program but also adding to its cost, estimated by congressional analysts at $16.7 billion.

The backers of that idea, Sens. Johnny Isakson, R-Ga., and Christopher Dodd, D-Conn., chairman of the Senate’s banking committee, have suggested that their measure be attached to another pending bill aimed at throwing a lifeline to people hit by the recession, an extension of federal assistance to the millions in danger of exhausting unemployment insurance benefits.


The Isakson-Dodd proposal would extend the credit to June 30, 2010. It would also remove the first-time homebuyer requirement and raise the eligibility income limit to $150,000, or $300,000 for a couple. That’s double the current phase-out limits.

Provisions Of The New Proposed Homebuyer Tax Credit

So if this new bill that is piggybacking on an extension of unemployment benefits were passed, it would mean that the tax credit would be extended, and the new provisions would be:

  • You would not need to be a first time homebuyer – that provision would be removed.
  • It applies to homes purchased through June 30, 2010.
  • You must keep the home for three years.
  • The credit is refundable.
  • The credit is for $8,000 or 10% of the home’s value, whichever is less.
  • It phases out for incomes between $75,000 to $150,000 for single and $150,000 to $300,000 for couples.

So while it is still unsure as to whether this particular extension of the first time homebuyer tax credit will be passed, the momentum for an extension to be passed in some form is very real.  I would expect something to be passed at some point this  year.

UPDATE: A new bill has been “agreed to” by Senators, that would extend the credit and add a $6500 Tax Credit for current homeowners.  Details here.

What do you think?  Should the tax credit for homebuyers be expanded to all homebuyers, and extended until June of 2009?  Will the effect it has on our economy be worth it, or will it be just another large expenditure when we are already running huge deficits?  Let us know your thoughts in the comments!

Source: biblemoneymatters.com