During last year’s presidential campaign, I wrote about some of the tax policies being proposed by the Biden organization, with thoughts about what business owners, wealthy individuals, and those with significant estates should be considering in terms of preparing for the possibility of a Biden victory in November.
Now that President Biden has been inaugurated, the outlines of his tax program are coming into sharper focus. While most of the news in the first few weeks of his presidency has emphasized the administration’s efforts to combat the COVID-19 pandemic, President Biden’s tax policy aims will certainly come under greater discussion in the weeks to come, especially since the federal government is faced with the need to pay, not only for the pandemic stimulus programs passed during the Trump administration, but also for future aid in whatever form it is eventually passed by Congress.
The three principal arenas where the Biden plan will come into play are personal income taxation, estate and gift taxes, and business-related taxes. Here is a review of likely Biden initiatives, with some discussion of what individuals, estates, and businesses can do to prepare.
- Raising the top rate from 37% to 39.6%.
- Taxpayers with more than $1 million of taxable income would pay ordinary income tax rates on capital gains and qualified dividends, instead of the lower capital gains tax rate. This would also make tax-exempt sources, such as municipal bond interest, more attractive and would likely make tax-loss harvesting a central component of investment management.
- Taxable income above $400,000 would incur Social Security taxes (currently only applies to income above the Social Security wage base—$142,800 in 2021).
- On the benefit side of the ledger, the Biden plan proposes a $5,000 tax credit for family caregivers and also suggests incentives for the purchase of long-term care insurance (though the specific incentive is not currently specified).
- Also, a limited plus: repealing the $10,000 limit on deductions for state and local taxes (SALT). However, another proposal to limit the value of deductions for those earning $400,000 and more per year would work to somewhat counteract this benefit.
- Any increase in marginal rates or decrease in the availability of a lower capital gains rate would likely make tax-exempt income more attractive to top-bracket individuals (in 2021, single filers with $523,600 or more in taxable income or $628,300 for married couples filing jointly). It could also heighten the importance of tax-loss harvesting. This would also apply in terms of reducing taxable income overall in order to reduce a potential increase in Social Security taxes.
Estate and Gift Taxation
- Decreasing the estate tax exclusion limit. The 2017 Tax Cuts and Jobs Act (TCJA) raised the exclusion to $11.7 million (in 2021) for an individual and $23.4 million for a married couple. While this provision was already set to expire in 2025, the Biden plan would likely end it much sooner and also lower the limit to something between $3.5 million to $5 million for a single individual ($7–10 million for a married couple).
- Repealing the stepped-up basis for heirs. Currently, those receiving an inheritance get the fair market value of the asset at the time of the grantor’s death; repealing this would cause the heirs’ basis to be set at its value when the grantor acquired it. If the heirs then sell the asset, the appreciate and resulting taxes would be much greater than with a stepped-up basis.
- Increase in the estate tax rate from 40% to 45%.
Individuals with estates in excess of $5 million may want to consider accelerating their gifting strategies in order to remove assets from the estate under the current, more liberal limits. Some estates could also benefit from strategies like qualified terminable interest property (QTIP) agreements or disclaimer clauses that allow moving assets out of the estate, but with a certain amount of flexibility in timing in order to permit a clearer picture of pending legislation to develop. Any planning of this nature, of course, should only be undertaken with the aid of a qualified estate planning professional with a thorough knowledge of the estate and the intentions of its owners.
- Corporate tax rate would rise from 21% to 28%, and a minimum corporate rate of 15% (for companies with $100 million or more of net income but which owe no U.S. income tax) could also be imposed.
- Phasing out the 20% qualified business income deduction for those with incomes of $400,000 or more.
- Limit tax-free 1031 exchanges to those with incomes under $400,000.
Business owners may wish to consider re-structuring the nature of the income they receive, to the extent possible, moving it from earned to unearned. Increased contributions to retirement plans—especially 401Ks, with their higher contribution limits—can also reduce a business’s taxable income. Purchase of depreciable assets and other legitimate business expenses may be more advantageous to the business than retaining extra income and paying the resulting tax.
As a fiduciary financial advisor, I help clients make tax-efficient decisions in managing their long-term investments. If you would value greater clarity about your future resources or preparing for a new taxation environment, click here for a complimentary second opinion on your investment strategy.
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