Here’s How the Spending Bill Could Affect Your Pocketbook

Democrats have proposed numerous low- and middle-income tax breaks

Young woman working on laptop and taking notes
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Corrects the first bulleted item to show the top marginal tax rate would kick in for individual tax filers making $400,000 or more and married couples making $450,000 or more. Story was originally published Sept. 14.

Democratic lawmakers released details about their proposals for an ambitious $3.5 trillion spending plan on Monday, including changes to the tax code that could affect your pocketbook if the package is passed in its proposed form.

Key Takeaways

  • Legislation drafted by Democratic lawmakers includes tax credits for low-and medium-income workers and tax hikes for high earners.
  • Most of the proposals are the same as they were in President Joe Biden’s budget plan this spring. 
  • The proposed top rate for capital gains taxes did change, though, to 25% from the 39.6% Biden originally wanted.
  • Some other items could still change in order to make it through a narrowly divided Senate.

Lawmakers are still hammering out the details of a Democratic legislative plan to overhaul the social safety net and tax code, the basics of which were laid out by President Joe Biden earlier this year, as well as a proposed bipartisan infrastructure bill. Most of the changes to the tax code—cuts and credits for low- and middle-income earners, increases for those making more than about $400,000—reflect what Biden asked for in his budget plan in May, although the tax increases have been tweaked.

Here are some of the changes that could impact your finances: 

  • The top individual income tax rate would be raised to 39.6% from 37%, just as Biden had proposed, undoing a Trump-era tax cut. The increase would affect individuals with incomes above $400,000 ($450,000 for married couples). Currently, the top marginal tax rate applies to individuals earning $523,600 and married couples earning $628,300.
  • The top long-term capital gains rate would be increased to 25% from its current level of 20%. The tax, which kicks in when you sell a stock or another asset after holding it for at least a year, ranges from 0% to 20%, depending on your income, with the top rate applying to individuals who earn $441,450 or more. The proposed increase is less than the 39.6% top rate that Biden had called for. Biden’s original plan to tax capital gains at death was absent from the draft legislation.
  • Child tax credit increase and monthly payments extended through 2025: The bigger and more widely distributed child tax credit authorized for 2021 would run for another four years, just as Biden proposed this spring. The credit was increased to a maximum of $3,600 per child for 2021, up from $2,000; made available to people who didn’t make enough income to claim it before; and changed from being a strictly year-end credit to including advance payments that have been going out monthly since July. The proposed legislation would extend these changes through 2025. However, further changes to the credit might be in store: Democratic Sen. Joe Manchin of West Virginia said in interviews last week that the credit should come with a work or education requirement for recipients. Democrats likely need all of their senators on board to get the bill through the Senate. 
  • Increased child and dependent care tax credit made permanent: The child dependent care tax credit, which reimburses taxpayers for a certain percentage of their child care expenses, was greatly increased for 2021, and the proposed law would make these changes permanent. The new credit is more generous一up to $8,000 instead of $1,200 for people with two or more dependents, for example一and it now applies to people who previously didn’t qualify because they had too little income.
  • Increased and expanded earned income tax credit for workers with no children made permanent: The earned income tax credit, a yearly tax break for low-income workers, was temporarily boosted to a maximum of $1,502 from $543 for childless workers, and the minimum age to collect it was reduced to 19 from 25 by the American Rescue Plan. The proposed legislation would make these changes permanent. 
  • More money for home energy-efficiency tax break: The proposal would triple the value of green energy tax credits, which pay for homeowners to install energy-efficient equipment like heaters and windows, from 10% to 30%, up to $1,200 per year.
  • Permanently increase Obamacare subsidies: The American Rescue Plan increased subsidies for people to buy private health insurance on government-run exchanges, expanding eligibility to people who make more than four times the federal poverty level, and increasing subsidies for people with lower incomes. The proposed law would make these changes permanent.
  • Allow the government to negotiate for lower drug prices: In a move intended to reduce the price of prescription drugs, the law would allow the federal Medicare program to negotiate with drugmakers and set maximum prices. Studying a previous proposal to allow the government to negotiate drug prices, the Congressional Budget Office estimated in 2021 that the move would reduce prices by as much as 75%.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.