Some couples could face a “marriage penalty” under Biden’s tax plan
Image source | Getty Images
The richest Americans could soon face a slew of tax hikes.
President Joe Biden wants to raise taxes for single applicants who are likely to earn over $ 452,700 and couples who earn more than $ 509,300.
But the plan could result in some higher-income couples being penalized.
The marriage penalty
“It’s not the first time we’ve seen a marriage penalty,” said Sabina Smailhodzic Lewis, certified financial planner and co-owner of Avantgarde Wealth in Bowling Green, Kentucky.
The so-called “marriage penalty” occurs when couples pay more tax together than individually. Couples who earn similar incomes are more likely to be affected, according to the Tax Policy Center.
“There is a certain level that our government officials believe there is enough income per person or household,” said Smailhodzic Lewis.
More from Personal Finance:
How Biden’s capital gains proposal could hit the middle-class home seller
Biden’s inherited property tax can affect more people than just the rich
How Biden’s real estate tax plan can hit smaller real estate investors
Currently, the tax code separates single and married applicants, with a 37% maximum for those earning more than $ 523,600 and couples earning more than $ 628,300.
Biden plans to raise the highest tax rate to 39.6%, which will affect the “top 1%,” according to the White House plan outlined on Wednesday.
However, the proposal may still affect people earning less than $ 400,000.
For example, let’s say each person makes $ 260,000. According to Biden’s plan, these couples can pay higher taxes together than alone.
The measure would apply to less than 1% of families, the latest data from the IRS shows. Affected couples could get a surprise at tax time, however, say financial experts.
“This requires very specific analysis for married couples,” said Alvina Lo, New York-based chief wealth strategist at Wilmington Trust.
Tax planning strategies
Fortunately, financial experts say it’s time to prepare for upcoming tax changes.
If the law doesn’t go into effect until 2022, Smailhodzic Lewis is expected to keep an eye on the timing of income at the end of the year or the first quarter. Self-employed applicants can try to accelerate income from 2022 to the end of 2021 before the measure goes into effect.
Couples who cross the threshold can also investigate filing taxes separately.
“Any prints you can make will be far more important,”
Chief Wealth Strategist at Wilmington Trust
“The way the numbers change can definitely put you in situations that make you feel better when you’re single because of the way our tax system works,” Lo said.
Those affected may need to prioritize deductions, she said.
Couples can consider deferred tax accounts like a 401 (k) or an individual retirement account to help reduce income. Charitable donations may also be considered with these tax deductions.
“Any prints you can make will be far more important,” she said.
With the details still in flux, high earners may be tempted to make portfolio changes while taking advantage of current capital gains rates.
But Lo warns against jerky reactions to the proposal.
“You really have to have a plan and be ready to pull the trigger for strategies depending on which way the wind is blowing,” she said.