President Joe Biden officially became the 46th president of the United States on January 20th, 2021 accompanied by Vice President Kamala Harris, our 49th Vice President. With any new administration, changes are expected. The Biden- Harris administration of course is no exception. President Biden’s and Vice President Harris’ primary goals are to fight the Coronavirus and the toll it has taken on the economy, extend healthcare, invest funds in green energy, and raise taxes for wealthier individuals - to name a few.
The new administration has a number of proposed tax law changes with the plan to raise nearly $4 trillion in additional revenue over the next decade. While these are still “proposed” changes, it is important to know what that "might” mean to you as an individual if they are put into motion.
- Raise the top income tax rate back to 39.6% from 37% which is where it has been since 2018. Keep in mind, this does not affect the Net Investment Income Tax of 3.8% on certain individuals, estates, and trusts that have income above certain amounts.
- Increase tax rates on capital gains and qualified dividends on investment income at the new ordinary income tax rate of 39.6% for taxpayers with an income above one million. Currently, ordinary dividends are taxed as ordinary income. Capital gains however are taxed at 20%, 15%, or 0% depending on your tax bracket. In other words, this means the top rate on long-term capital gains would nearly double from 23.8% to 43.4%.
- Restore the Pease limitations and cap the benefit of itemized deductions at 28%. Deductions include mortgage interest costs, charitable contributions, and possible state/local taxes.
- Do away with the step-up in basis loop-hole that allows decedents to pass capital gains to heirs without taxes.
- Upon death, unrealized capital gains would be taxed.
- Apply the Social Security (FICA) tax to those with earnings above $400,000. This change would impose a 12.4% tax on Social Security wages and self-employment income on amounts over $400,000.
- Decrease the current unified tax exemption from its current level of $11.7 million to $5.5 million or even less.
- The maximum Child and Dependent Tax Credit would rise from $3,000 to $8,000.
- Relief and forgiveness would be increased for those with student loan debt. This includes immediately cancelling $10,000 of federal student loan debt per person as part of COVID relief. Also, proposing free college tuition in some circumstances.
- The first-time homebuyer credit would be reinstated.
- Refundable tax credits for health insurance premiums would be applied so families would not have to spend more than 8.5% of their income on health care costs. There would also be increased tax benefits for the purchase of long-term care insurance.
- Currently, there are some beneficial tax treatments in real estate such as 1031 exchanges that may be repealed for taxpayers who earn more than $400,000.
It doesn’t matter what side of the table you are on, nobody likes taxes (no offense to our CPA friends out there!) but we hope this article is helpful. Given the potential likelihood of these changes it may be prudent to review your existing financial plan. If you have highly appreciated investment assets and real estate holdings it may be worth considering ideal liquidation timing. Additionally, if you have a larger estate you may want to think about using your full exemption (and the additional $120,000 that inflation adjustments added) sooner rather than later. If the Pease limitation is restored, depending on your income, tax on charitable deductions may increase so it may be worth thinking about the best time to make charitable donations. These are just a few thoughts. Your CPA or advisor is probably already considering the impact of these proposed changes. We are also happy to help you with questions. As a financial planning firm, it is one of our jobs to work with your CPA and consider the tax code and its implications on our clients’ financial future.