How will Biden's policies affect my money?

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

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Featured Image How will Biden's policies affect my money?

Joe Biden was sworn in as president on January 20. He has already outlined policy plans for taxes, retirement savings and estate planning — all things that can directly affect your money. While it’s not guaranteed all (or any) of them will become law, it’s important to understand what changes may be coming and how to prepare your money.

Here’s what you need to know about the incoming Biden administration’s policies and how they may affect your personal finances.

1. COVID-19 aid

Relief from the economic crisis caused by COVID-19 will be Biden’s first priority upon taking office.

Congress passed a $900 billion dollar stimulus plan in December that includes up to $600 in direct aid per person. The amount decreases if you made more than $75,000 in 2019.

Here’s our advice on the best ways to spend your stimulus money.

The Democrat-controlled House of Representatives also passed a bill to increase stimulus payments to $2,000, but it ultimately died in the Senate. Now that Democrats have control of both the House and the Senate, it’s likely a more generous stimulus package will pass. Biden has expressed support for more aid.

In the meantime, we have the answers to all your COVID-19 money questions. You can also learn how some experts believe COVID-19 will permanently affect personal finance.

2. Taxes

The 2017 Tax Cuts and Jobs Act drastically changed the tax code (we have a primer on the bill here). Biden plans to undo some of those changes. The most talked-about one is raising the marginal tax rate for those earning more than $400,000, from 37% to 39.6%. Funds generated by these policies would be used to fund Social Security.

“A lot of Biden’s tax proposals won’t affect 80% of America,” said Malcolm Ethridge, financial advisor at CIC Wealth. “But for wealthy clients, it’s going to completely change the way they manage money.”

Biden’s tax plan also includes provisions to help families, including raising the Child Tax Credit maximum from $2,000 to $3,000 with a $600 bonus credit for children under 6. This credit gives a tax break to parents and guardians with children under age 17. He also said he would expand the Child and Dependent Care Tax Credit maximum to $8,000 ($16,000 for multiple dependents), up from $3,000 ($6,000 for multiple dependents). This credit is for people caring for a qualifying dependent while working or looking for work. It’s typically used for expenses like daycare.

Here’s a guide to tax credits in 2020.

Lastly, Biden said he would bring back the First-Time Homebuyers Tax Credit, removed under the 2017 tax law. This credit awards up to $15,000 for qualifying first-time homebuyers.

Biden’s plan may undergo changes before it’s signed into law. It’ll need to pass Congress first, said Michael Metzger, certified financial planner and founder of LifePoint Financial Design. Keep in mind that state and local governments also levy taxes, and many are currently in the red due to the pandemic. Some states are weighing raising property taxes, which will affect homeowners.

While your 2020 taxes likely won’t be affected, it doesn’t hurt to plan for future changes. Consider revisiting your tax withholding and remember to take advantage of all the deductions and credits you can when filing.

Here are 50 tax deductions and credits you can take in 2021.

3. Investing

Another Biden proposal would remove the favorable capital gains tax rate for households making over $1 million. Capital gains are the money you make on an investment held more than a year, and are typically taxed at 20%. If eliminated, taxpayers would be taxed at the same rate as ordinary income (39.6% for the highest bracket).

Ethridge believes that eliminating capital gains would place a “chilling effect” on the market. He also argues that the effect of less money in wealthy Americans’ pockets may trickle down to lower-income investors and small businesses.

“It’s basically going to de-incentivize selling,” he said. “This can affect companies’ funding and ability to grow quickly. As an advisor, it really will change the way I think about when to buy and when to sell.”

Richard Kahler, certified financial planner and founder of Kahler Financial Group, says Biden’s policies may have an effect on the markets, but most investors should continue with their current investing plan and rebalance when needed.

“A lot of my clients called me saying they want to get out of the markets, which I disagree with. I think it can be easy to be influenced and fall for political persuasion,” he said. “Your best bet is to wait and see how things play out.”

4. Retirement

Biden is proposing to eliminate the current tax deduction for 401(k)s and offer a flat tax credit instead. Right now, someone making more money gets a larger deduction than someone with a lower income, which Biden hopes to address. He also has a plan to help caregivers contribute more for retirement.

The president-elect is also encouraging states to adopt “auto-IRA” programs, which allow employers who do not offer 401(k)s to enroll their employees in individual retirement accounts and set up payroll deductions to fund the accounts. These programs often benefit small businesses. Currently, three states — California, Illinois and Oregon — are running an auto-IRA program and four more states — Connecticut, New Jersey, Colorado and Maryland — have passed legislation to launch similar programs.

If you have a solid plan in place, it’s best to stay the course on your retirement plan, said John Scott, project director of retirement savings at Pew Charitable Trusts. Changes to retirement likely won’t happen within the next year.

“I think a lot of people are open to retirement benefit changes, but it’s lower priority ” he said. “I don’t think individuals should do anything drastic right now.”

5. Estate planning

The lifetime gift and estate tax exemption is $11.7 million per individual and $23.4 million per married couple, under the 2017 tax law. This is the amount you can give away to others over your lifetime without being subject to the 40% estate and gift tax. Those amounts are set to revert back to $5 million in 2025.

Some financial experts like Kahler believe Biden may accelerate that reversion. The president also wants to eliminate the “step-up basis” for people passing down assets to their children, and reduce the annual gift tax limit from $15,000 to $13,000. This would affect investors and families with significant assets, said Kahler.

How does removing the step-up basis work? Let’s say you inherit an asset from your Mom worth $10,000, which she bought for $5,000. You then sell it for $15,000. Under old rules, you would owe taxes on $5,000 of gain. Under Biden’s plan, you would owe taxes on $10,000.

“Anyone who has an asset they were planning to give to their kids when they die are now giving it away now to avoid a higher tax bill, or moving it to a trust,” said Kahler.

If you are concerned about your estate plan, Kahler recommends talking to a financial adviser or estate attorney. We also have a breakdown on how trusts work and a complete guide to estate planning to help you get started.

6. Student loans

Student loan debt is a $1.7 trillion-dollar crisis in America. Biden campaigned on the promise of student loan forgiveness, and has yet to outline any clear plan.

If you have student loan debt, Metzger recommends not to bank on government help anytime soon. Here are a few things you can do in the meantime:

  • Set a budget. Once you know where your money is going, you can figure out where to cut back. This could include canceling subscriptions or ordering less takeout.

  • Adjust monthly payments. The Department of Education offers options for students to adjust their payments based on their income. Learn more here.

  • Consolidate your loans. This will make it easier to keep track of them (and may get you a better interest rate).

  • Refinance. Interest rates are at all-time lows, including student loan interest rates. Refinancing your loan to a lower rate saves you money over time. Keep in mind you’ll need a solid income and higher credit score to qualify.

  • Make extra payments. Through Jan. 31, 2021, the DOE suspended federal student loan payments and set interest rates to 0%. If you’re able, pay off more this month — the entire payment will go toward the principal of your loan, reducing it much faster.

7. Health care

Biden has vowed to strengthen and build on Obamacare, which passed in 2010 while he was vice president. Biden proposes a new, public health insurance option for adult Americans, similar to Medicare, and increased tax credits to go toward health insurance premiums.

Despite health care being a top issue for voters, comprehensive reform seems far off given how divided Congress is over legislation, said Metzger. What’s important now is to understand your options, especially when health insurance literacy is extremely low. Low literacy is linked to more frequent emergency room visits and less frequent use of preventive care, according to a study.

If you’re employed and are curious about your own health insurance plan, there are resources available. If you have a private plan, reach out to your benefits provider or the human resources department. Or, if you have a federal health insurance plan, is a great resource to learn about coverage.

Stick to your plan

There’s only so much a president can do. Law changes and major overhauls are created and passed in Congress, though the president can veto a bill. The president can also issue executive orders, but not all of them can be legally enforceable.

If you’re worried about your money, experts agree that the best course of action is to stick to your plan. Presidents typically don’t have a long-term impact on the stock markets, and impulsive money decisions typically do more harm than good. A 2018 Vanguard study found the average portfolio return under Democratic presidents was 8.4%, compared to 8.2% under Republican presidents, an inconsequential difference.

If you want to stay on top of the money news in the coming months, check out our weekly Easy Money newsletter. We’ll break down the top headlines and offer actionable tips on growing your wealth. You can sign up here.

Image: GettyImages / Nastia Kobzarenko