Potential Tax Changes with President Elect Biden
President-Elect Joe Biden will begin the first year of his Presidency in the midst of the economic mess caused by the COVID-19 pandemic. During his campaign, Biden discussed his plan to increase taxes on the wealthiest Americans and corporations to help rectify the economic distress.
Tax planning is a challenge this year because even though we are aware of the potential proposed changes, we do not know how Congress will vote. However, understanding the impact of the proposed changes may be helpful (knowledge is power!) Following are some potential tax changes based on Biden’s policy plan:
Individual Income and Social Security Taxes:
If your income is over $400K, income tax rates may increase from 37% to 39.6%.
Additionally, individuals with income over $400K will continue to be required to pay social security taxes on income that is below $137,700, and will also be taxed on compensation above $400K.
Tax Tips:
If you can, you may consider moving some of your 2021 income to 2020. This could save thousands of dollars.
If you will receive a bonus that will put your 2021 income over $400K, you may want to try to have the bonus paid out in 2020.
Corporate Taxes:
Biden’s plan proposes raising the top tax rate from 21% to 28%. The plan also includes a 15% minimum tax on corporations with over $100M or more in annual net income.
Tax Tips:
If you are a small business owner, you may want to take advantage of the favorable taxation policies in 2020 and put as much income and capital gains in by the end of the year.
Stock Options and Capital Gains:
If you sell a stock less than one year from the date it was purchased, you must pay short-term capital gains, which are taxed as ordinary income.
Under Biden’s plan, this tax rate could be increased from 20% up to 39.6%.
If you have over $1M, Biden’s plan may require you to pay higher ordinary income tax rates, and long-term gains will be included.
Tax-loss harvesting, which is a technique used to get more value from investments and reduce taxes on capital gains, is more valuable under Biden’s plan.
Tax Tips:
You may want to sell your stock options in 2020 if they are non-qualified and produce ordinary income taxes.
Tax rates significantly decrease when stocks are held for longer than a year, so holding on to stocks to avoid the tax rate may be something to consider.
If there is a decline in the value of your investments due to a decline in the market, you could take advantage of tax-loss harvesting, sell your securities for a loss and effectively wipe out any capital gains tax liability.
Estate Planning
Currently, when a property is inherited following a death, the basis of the property is increased to the fair market value as of the date of death, but the heir does not have to pay capital gains taxes.
Biden’s plan would remove this benefit from the step up in basis and calculate taxes based on the purchase value. For example, if a property was purchased for $2M and valued when inherited at $7M, the heir would be taxed on the $5M gain.
Another part of Biden’s plan is in regards to the Estate and Gift Tax exemption from the Tax Cuts and Jobs Act. Currently, you can utilize the $11.58M per person to give gifts during your lifetime or pass on assets at death. Biden’s plan would decrease this amount to $5.49M, and any gifts given over this amount would be subject to a 40% estate and gift tax.
Tax Tips:
It Is always a good Idea to meet with your estate planning attorney at least annually. Please contact me if you would like a trusted referral.
If you have valuable real estate or business interests that are likely to appreciate in value, you may want to consider charitable trusts or grantor retained annuity trusts.
Tax Credits
Biden hopes to make the Earned Income Tax Credit (EITC) available for individuals who are 65 years of age or older, are working, and are without qualifying children. The EITC provides a dollar-for-dollar reduction in taxes owed AND is refundable, which means that if you qualify, you could get more back in federal taxes than you pay.
Here is an example of how this could be helpful: a 68 year old with no children is making $15K per year and owes $100 in taxes. With the EITC of $538, this individual could receive $438 back.
It is important to reiterate that we do not know what will happen with any of Biden’s plans. Any financial changes that you choose to make based on the plans and tax tips discussed above may prove to be unnecessary. The Republican-controlled Senate may make it challenging to pass tax increases on high earners and companies. Instead, Biden may choose to focus his efforts on changes of how tax law is interpreted and administered.
We will continue to keep you informed about any tax changes and updates. Please contact us with any questions.