How Biden's Tax Plan Could Affect You
Despite Trump’s attempts to overturn the recent Presidential election outcome, it’s looking more and more likely that Joe Biden will enter the White House in 2021.
Though Biden’s team has not released a comprehensive, detailed tax proposal, he has promised to raise taxes on the wealthy and cut them for others, while increasing benefits for the lowest earners. The Biden team generally draws the line between earners at $400,000 of annual income.
The following explains the most notable tax changes Biden has proposed and how they may affect you.
Raise income-tax rates on the highest earners
Biden has proposed reverting federal income tax rates to pre-2018 levels for those earning more than $400,000 per year. Those in the highest tax bracket may be taxed at a rate of 39.6%, versus 37% now.
Affected earners should consider accelerating income in 2020 at a likely lower marginal tax rate by exercising stock options, completing Roth conversions or potentially taking bonuses early, if possible, among other things.
Re-establish First-Time Homebuyers’ Tax Credit
This credit was originally established during the Great Recession to support the housing market. Biden wants to offer a tax credit of up to $15,000 for first-time home buyers to incentivize new buyers to jump into the market.
If you’re a first-time homebuyer close to pulling the trigger on a new place, it may be in your best interest to wait until 2021 to buy, assuming you might be eligible for a sizable tax credit. In the meantime, be sure to check out my podcast interview on why you shouldn’t overspend on your home.
Raise tax rates on capital gains and dividends
For those earning $1 million in taxable income, long-term capital gains and dividends could be taxed at the same rates as ordinary income, which could be as high as 39.6%, versus 23.8% currently.
A good problem to have with that level of income, right? Those potentially affected by this change are incentivized to accelerate earnings this year to try and stay under the $1 million income mark in future years.
This potential change makes tax loss harvesting all the more important, especially for those in higher tax brackets.
Tax capital gains on inherited accounts
Biden has proposed eliminating the “step up” in cost basis at the time of death. This would basically result in heirs paying taxes on inherited assets at a gain, if the original account owner was a high-income earner.
For example, if John owns ABC stock worth $30,000 that he bought for $20,000 (his cost basis) years ago, he has $10,000 in capital gains. If he dies in 2020, neither he nor his heir(s) would pay capital gains tax on the $10,000 in gains, no matter how much income John earns. In other words, John’s heirs would receive a “step up” in cost basis.
If John dies under Biden’s new potential tax plan, and he earns an annual income over $400,000, his heirs may incur a capital gains tax when they inherit his assets.
This would essentially reduce the amount of wealth being transferred among high-earning families, and this tax would be used to fund breaks to lower-income households. Learn more about how to plan for an inheritance.
Shift estate and gift taxes
Though the proposal would face an uphill battle in Congress, Biden has hinted at shifting estate and gift taxes back to 2009 law, which would lower the estate-tax exemption to $3.5 million per person, a 70% decrease from current levels of $11.58 million.
Get your trusts out! Under this potential tax plan, if you have a nest egg worth a few million dollars, you could owe estate taxes. It may be in your best interest to review your estate plan and potential trust(s) with an attorney to ensure you aren’t eventually paying more to the government than you need to.
Impose additional Social Security tax
In the interest of further funding a much-needed Social Security budget, Biden has pushed for the current Social Security tax of 12.4% to apply to employment and self-employment earnings above $400,000.
Currently, the income cap for this tax is $142,800, and there may be a gap between those two income levels in which you would not incur this tax. Keep in mind, unless you are self-employed, your employer covers half (6.2%) of your Social Security tax.
While these proposals are all very preliminary, and will likely face fierce debate in Congress, it’s clear that the Biden administration is focused on taxing high earners (with annual incomes over $400,000) more aggressively to fund benefits and breaks for those in lower tax brackets. If you fall in the highest bracket or think you might in the coming years (well done!), it will be in your best interest to strategize how to avoid or reduce some of the potential tax hikes coming your way.
To read more about Biden’s tax plan, click here.
If you want to learn about tax-saving actions that you can take before potential tax changes go into effect, reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.