The Biden Tax Plan and You
Potential Tax Changes Under the Biden Administration
We are early in the Biden Administration and what will happen to our various tax rates and tax laws is still speculation. However, the new administration is floating ideas, testing the waters, and beginning to communicate direction. What we do know is that the Federal government is saddled with $28 Trillion in debt and will likely raise taxes to support a growing budget and deficit.
If you make or have a lot of money, you will need to be particularly vigilant as the new laws emerge. While nothing is certain at this time, here is the direction that we may be heading.
Change in Tax Brackets
The highest marginal today is 37% for incomes over $628,301 per year (Married Filing Jointly). This will likely go up to 39.6%.
Elimination of Long-Term Capital Gains Tax Rates on Incomes Over $1 Million
This means a jump from 20% to 39.6% in years of very high income. This has huge implications for people who have one-time capital events from a business sale or other transaction.
Increased Social Security Tax
This “hidden income tax” has been creeping up for years. The current tax rate is 12.4% (50% paid by company & 50% paid by worker) on wages up to $142,800. The proposal is to apply the tax of 12.4% to people making more than $400,000 per year. That is a significant change in taxes for higher incomes.
Increased Corporate Tax Rates
The current corporate tax rate is 21%. The discussion is to raise this to 28% and create a minimum tax liability of 15% for companies that make $100 million per year in income. That would put the US corporate tax rates at levels above Europe, above the average for the global economy, and closer to the US’s 35% pre-TCJA (Tax Cuts and Jobs Act, 2017) rate.
Limitation on Itemized Deductions
There is a suggestion that itemized deductions should be limited to 28% of their value for people earning over $400,000. Currently, itemized deductions reduce taxes 32% to 37% depending on your marginal tax bracket. Once again, increases effective taxes.
Phase-Out of Itemized Deductions
Moreover, there is discussion about phasing deductions as incomes increases. This also raises taxes on higher-income people.
Lower Estate Tax Exemption
Estate tax exemptions are currently $11.7 million per person and are set to reduce by 50% at the end of 2025. These are some of the most generous rates historically. It was as low as $1 million in 2002 with 50% tax rates. However, the Biden administration is discussing reducing exemptions to as low as $3.5mm per person (which were the rates in 2009). To make this worse, the current estate tax rate of 40% might be raised to 45% (same as 2009).
Elimination of Estate Step-Up in Basis
Current law allows assets to be “stepped up” at the time of death (adjusting the value of an appreciated asset to be what it is upon the owner’s death rather than when acquired), minimizing or eliminating some future capital gains taxes. There is a discussion to eliminate this favorable tax treatment which will raise “death taxes.”
Change in 401k Rules
Another proposal is to create tax credits for 401k contributions and to phase these out on higher incomes. But also create more incentives for lower incomes earners to save.
An Important Year to Plan
Again, these are all ideas under discussion. For lower-income earners, there are no major changes unless you are possibly set to inherit money from your parents. Proposals here may reduce what you get. For higher-income earners, there is a real possibility of a significant new tax burden. And for people with significant assets, there will be some important estate planning strategies to consider.
This may become one of the most important planning years ever!
IMPORTANT NOTE: THIS MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO SERVE AS A SUBSTITUTE FOR PERSONALIZED INVESTMENT ADVICE OR AS A RECOMMENDATION OR SOLICITATION OF ANY PARTICULAR SECURITY, STRATEGY OR INVESTMENT PRODUCT. KINGS PATH PARTNERS DOES NOT PROVIDE TAX, LEGAL OR ACCOUNTING ADVICE.
