As of today, all indicators point to a change of administration in the White House when Joe Biden officially becomes president of the United States on January 20, 2021. Not just that, the party in power will change from Republican to Democrat. That’s a whole lot of change for Americans to deal with in a normal year—and 2020 has been anything but normal.
Whether you have your doubts about the incoming administration or you can’t wait to see a new leader in action, the overwhelming questions in your mind likely center on what Joe Biden’s policies might change, and even more importantly, how they could affect you. We’re going to dig into that, but first—let’s get some perspective on a couple of things.
Americans are quick to give the president of the United States too much credit for how much change that person can bring about. Our government was created with a pretty genius system of checks and balances that requires a lot of teamwork to get anything done. So, yes, once Biden is in office, he could use what’s called “executive orders” to bring immediate change to things like the minimum wage, but he’ll have to work with Congress to pass legislation that would change tax laws or Social Security. And you can bet those folks will have a list of changes and proposals of their own that will alter Biden’s original plans, if any make it through the gauntlet of committees and approvals.
Knowing all that, it’s still important to be aware of the changes that could come. That way you can take advantage of the benefits—or plan for the potential hit. So, we’ll dig into the details of a few of the proposals Biden campaigned on that could affect you and your money the most. We won’t try to hash out whether they’re the right or wrong thing for the country—there’s plenty of people doing that. We’re going to focus on your finances.
Ready? There’s a lot to take in!
Biden’s Plans for Student Loan Forgiveness
It’s no secret that the $1.5 trillion-plus student loan crisis is a huge burden for millions of Americans.1 The COVID-19 pandemic didn’t do anything to help that. Biden, along with several other presidential hopefuls, campaigned on promises of student loan forgiveness. And since being elected, Biden has repeated his commitment to cancel some amount of student loan debt, but how—and how much—is still a bit of a mystery.
What we know about Biden’s proposal: Biden was a fan of legislation passed in the House earlier this year that proposed $10,000 per borrower in student loan forgiveness as part of a coronavirus relief bill. But the bill wasn’t supported by the Republican-controlled Senate. Some Democratic leaders are pushing Biden to cancel as much as $50,000 per borrower and to go around Congress by writing an executive order to get it done.2 But not everyone agrees the president has the power to do that. (It’s likely the Supreme Court will have something to say about that though.)
The fact is, the government already has multiple student loan forgiveness programs. And none of them are all that good at actually forgiving loans.
- The Teacher Loan Forgiveness program is designed to cancel up to $17,500 in federal student loans for teachers. But the requirements are tough to meet and include teaching at low-income schools full time for five academic years.3
- To qualify for the Public Service Loan Forgiveness program, you have to work full time for the government or a nonreligious nonprofit, be on an income-driven repayment plan, and prove that you’ve made all your student loan payments on time for 10 years.4 As of September 2020, only 3,469 people (out of 229,215 applications) had their loans forgiven through the program—that’s only about 1.5%!5
Our advice: You’ve got two good reasons not to rely on a government plan to solve your student loan debt. One, there’s no way to know if Biden’s student loan debt forgiveness proposal (whatever it ends up being) will ever actually become a reality. And second, if it does, there’s no way to know what the requirements will be or if the plan will actually be effective.
You know what is effective? You, with the right plan to tackle your student loan debt. Just follow the Baby Steps:
- Save $1,000 for a starter emergency fund.
- If your job and income are stable, start throwing as much cash as you can at your debt. Start by paying off the smallest balance and work your way up to the largest, rolling the payment from each paid-off debt into the next one so you’re building momentum the whole time. We call that the debt snowball.
You can also consider refinancing your student loans if it makes sense for you. A better interest rate and shorter term mean those student loans could be out of your life faster than you thought possible. Check with the only refi partner we trust to see if refinancing is a good option for you.
Biden’s Plans for Income Taxes
As president, Biden hopes to make a lot of changes to our income tax system with the overall goal of making it more progressive. In political-speak, progressive means the more you make, the more you pay in taxes as a percentage of your income. According to the Tax Policy Center, Biden’s plan will raise taxes by $2.41 trillion over the next 10 years.
If his plans take effect as they are, in 2022:
- Households making between about $50,000–90,000 would get an average tax cut of about $6,700.
- Higher income households ($330,000–790,000) would be hit with an average $98,000 tax increase.
- The top 1% of earners ($790,000 or more) would pay an average of $265,000 more than they do now.
What we know about Biden’s proposals: Many of Biden’s proposed changes are aimed at families, so a lot of single people and couples without kids on the lower- and middle-income ranges won’t see all the benefits of those changes.6
Child Tax Credit
For example, he would increase the Child Tax Credit from the current maximum of $2,000 to $3,000 for each qualifying child under age 17. He’d also add a $600 bonus credit for children under 6 and make the credit fully refundable. That means if a family’s Child Tax Credit is more than the amount of taxes they owe, they will receive a refund for the difference. The current credit is refundable but is limited to 15% of the household’s income that exceeds $2,500.7 (If that seems weirdly complicated to you, that’s because it is.)
So for a family with three children, ages 12, 8 and 5, and a household income of $75,000 a year, their current Child Tax Credit would be $6,000, and even with the weird math, they could get a refund for the full amount. Under Biden’s proposal, that same family would get a $9,600, fully refundable credit.
Child and Dependent Care Tax Credit
Biden would also expand the Child and Dependent Care Tax Credit to help families with expenses like daycare. Currently, the maximum credit is $3,000 ($6,000 for multiple dependents) for qualified expenses.8 Biden would raise the max to $8,000 ($16,000 for multiple dependents) and increase the maximum reimbursement rate. Currently, you can be reimbursed for up to 35% of your qualifying expenses. Under Biden’s plan, you could be reimbursed for up to 50%.9
In real life, that means a family paying $30,000 a year for daycare for two kids would see their Child and Dependent Care Tax Credit go from $6,000 to $15,000.
First-Time Homebuyers Tax Credit
Biden would also bring back the First-Time Homebuyers Tax Credit, now being called the First Down Payment Tax Credit, that was created during the Great Recession to encourage people to buy homes again. Under his plan, qualifying first-time homebuyers would receive a tax credit of up to $15,000 when they purchase a home.10
On the other side of these tax benefits are tax hikes that, like we mentioned before, are aimed at higher income earners. Here are just a few:
- Tax rates for households making more than $400,000 would increase from 37% to 39.6%.
- Households that make more than $1 million would see their long-term capital gains (money you make when you sell an asset you’ve owned for more than one year) and qualified dividends (a portion of a company’s profits that are distributed to shareholders) taxed at their ordinary income tax rate of 39.6%, instead of the current 20%.
- The estate and gift tax rate and exemption would go back to 2009 levels, making more gifts and estates subject to the tax at a higher rate.11 Estate taxes reduce the value of an estate before it is distributed to any heirs, and the gift tax applies to gifts of money or property of more than $15,000 in value (Biden would change that to $13,000). And the giver is responsible for paying the tax.12
- A 28% cap on the tax benefit of itemized deductions for those who make $400,000 or more would keep some of those folks from getting the full advantage of all the deductions they qualify for.13
Our advice: Always take advantage of the deductions and tax credits you qualify for. Really—no one should pay more in income taxes than they have to! But keep in mind—these increased tax credits could result in a larger refund for some folks. It sounds fun until you realize that money should be in your pocket (not Uncle Sam’s) all year long.
You may need to adjust your W-4 when (or if) these proposals are approved so you bring home more money in your paycheck and keep your income tax refund as close to zero as possible. But don’t get ahead of yourself and make changes before you need to. It’s not likely any of these will affect your 2020 taxes.
When it comes time to actually file your taxes, whatever changes that may have taken affect could end up being confusing. For people with a pretty simple tax situation who feel confident working with tax software, self-filing with Ramsey SmartTax is a great option with no hidden fees and no confusing tax jargon to trip you up.
But if you think you’re going to take a tax hit or you just don’t want to risk messing anything up with your taxes, work with one of our tax Endorsed Local Providers (ELPs) in your area. That way, you can rest easy knowing you have a tax advisor on your side to help you get your taxes done right. They can help you make the right adjustments to your withholdings at the right time.
Biden’s Plans for Social Security and Retirement Accounts
It’s a given that any incoming president will have plans to change Social Security, and Biden is no different. He’s also proposing some tweaks to 401(k) plans, and we’ll walk you through those too.
But if you don’t remember anything else from what we’re about to cover, remember this: Do not let a change in leadership in the White House cause you to make a huge mistake with your retirement savings plan. You’ll hear all sorts of predictions about how the economy and the stock market will react to Biden’s administration next year—and none of it will sound hopeful. But here’s the truth: The stock market has done well, and it’s done poorly, with both Democratic and Republican presidents. Same goes for the overall economy. The person who sits in the Oval Office has nothing to do with your retirement plan. That’s right—it’s up you. So, keep contributing to your 401(k), your Roth IRA, and do not cash them out “just in case.” A four-year presidential term is just a blip on the screen for a long-term investor like you.
Okay—with that out of the way, let’s talk about Biden’s plans for Social Security. First of all, Social Security is in trouble. Does anyone remember a time when it wasn’t? The trust funds that support the program are expected to run out of money in about 15 years. If that happens, beneficiaries would only receive about 80% of what they‘re owed.14
Biden wants to fix that and throw in a few extras too:
Minimum benefit: The average monthly Social Security benefit is about $1,400 per month, but not everyone receives that much.15 Many receive much less. Under Biden’s proposal, Social Security beneficiaries who have worked at least 30 years would receive a minimum yearly benefit of 125% of the poverty level—about $15,950 for a single person.16
Increased benefit for older beneficiaries: Biden also wants to boost beneficiaries’ benefits once they’ve received Social Security for at least 20 years, so long-time retirees can keep more of their savings. He hasn’t mentioned how much that increase would be.
Allow surviving spouses to keep more benefits: For a couple receiving Social Security benefits, if one spouse dies, the benefit is usually cut in half. Biden’s proposal would allow the surviving spouse to keep a larger portion of the benefits, ultimately increasing their benefit by 20%.17
Of course, all that has to be paid for—with taxes, of course. Biden would impose a 12.4% Social Security payroll tax on earned income above $400,000, split between the employer and employee. Currently, there’s no payroll tax for income above $137,700, and for now, people earning between $137,700 and $400,000 wouldn’t be taxed.18
Our advice: Don’t rely on Social Security to get you through retirement. Plan and invest as if it doesn’t exist—because it might not. Plus, you can do a much better job building wealth through your tax-advantaged retirement savings plans than the government ever could.
And speaking of retirement plans, Biden has a couple changes for those too. He’s proposing a flat tax credit instead of the current tax deduction for contributions to a 401(k). Right now, the contributions you make to your 401(k) are tax deductible, so someone making a larger income receives a bigger deduction than someone making a smaller income.
For example, a person who makes $600,000 and is in the 37% tax bracket gets a $370 tax deduction for every $1,000 they contribute to their 401(k). Someone making $60,000 and in the 22% tax bracket gets a $220 tax deduction for every $1,000 they contribute.19
Our advice: Biden hasn’t said how much the tax credit would be, but it really doesn’t matter. You shouldn’t invest for retirement because you get a tax break. You invest for retirement because long-term investing in a workplace retirement plan, especially one with a match, is the best way to build wealth for retirement.
So, if you’re debt-free and have your fully funded emergency fund (that’s 3–6 months of expenses saved in a separate savings account or money market account), invest 15% of your income in retirement. Start by investing up to the match in your 401(k), then invest the rest in a Roth IRA. If you have a Roth 401(k) option through your employer and it has good mutual funds to choose from, you can invest the full 15% in that plan.
And that brings us to the last proposal we’ll cover here, and that’s Biden’s plan to allow caregivers to make catch-up contributions to their retirement plans. Currently, you must have an earned income to contribute to a retirement plan, and only folks age 50 and over can make catch-up contributions.20 Biden’s proposal, based on bipartisan legislation by Representatives Jackie Walorski and Harley Rouda, would allow people who have been out of the workforce for at least a year to care for a family member, and had no income, to make tax-advantaged catch-up contributions to their retirement plans.21
Our advice: Any time you can contribute more than 15% to retirement—do it, as long as you’re out of debt, you have 3–6 months of expenses saved up, and your home is paid for. And always work with an investing pro on your retirement plan. Our SmartVestor program can connect you with an experienced investing professional who can help you find out if you’re on track to meet your retirement goals.
Whew! That’s a lot of potential change, and we really just scratched the surface of all the changes Biden wants to make that could affect your money. But here’s what you need to remember as all this starts to make the news: All the “experts” will make a huge deal of each one of these proposals. They’ll claim that they’ll either save the world or be the end of it. Don’t let the hype get to you. They’re forgetting two important details.
One, these are just proposals—nothing has happened yet to bring them about. Biden himself could change his mind about any of them. And once Congress gets involved, the final outcome is bound to look very different from his original plan.
And two, you are always in control of your finances—no matter who’s president or what’s going on in Washington, D.C. Don’t wait for the government to give you a stimulus check or tax cut or forgive your student loans. If you want more money in the bank and for your debt to go away, take control and make it happen.
Ramsey+ has the tools you need and a plan that will help you do exactly that. Best of all, it actually works—and you can try it for free!