Fragasso Financial Advisors is not providing a political opinion. The intent of this blog is to provide factual content on current and potential future tax laws. This is only one segment of Biden’s proposed tax plan, and the content is not intended to sway or endorse a specific political candidate.
We have not yet fully adjusted to the tax changes that came with the Tax Cuts and Jobs Act (TCJA) of 2018, and now the impending election brings upon concerns regarding additional modifications.
With both sides running neck and neck and the hot button topic of taxes in recent debates, many investors are contacting their financial advisors asking questions pertaining to what changes are being considered in anticipation of a Biden presidential win accompanied by a full “blue sweep” in the Senate. Rest assured, our portfolio management team has been proactively researching and strategizing on your behalf to determine possible portfolio changes whether Trump remains in the White House or if Biden takes over.
How may our tax structure change if we do experience a change in leadership?
First, it is important to note that most of the major changes that came with the TCJA are due to “sunset” in 2026 and revert to the rates and levels they were prior to those changes. Those reversions include personal income tax brackets, the estate and gift tax exclusion amount, the standard deduction amounts and mortgage interest caps, to name a few.
But, let’s dissect the specifics of Biden’s tax plan, and how could they affect you, if passed.
Tax bracket: If Biden’s plan is passed, the changes he’s proposing could go into effect as soon as 2021. The proposal includes plans to increase the personal income tax bracket to 39.6% for those who make over $400,000. But keep in mind, it hasn’t been made clear if this number is for individual or joint filers. Anyone whose income level is less, would not be affected by a change in tax rates.
Retirement plans: Currently, those of us who contribute to a retirement plan can deduct each dollar that goes into the plan from our income, subject to federal tax up to the IRS maximum each year. For 2020, those amounts are $19,500 if you are under 50 and $26,000 if you are age 50 or older. Biden is proposing a tax credit of 26% of the amount contributed. Remember, a deduction comes off the top of your taxable income, and a credit is an actual dollar amount that offsets your tax due. So, while still a benefit for those in the higher tax brackets, contributing to your company 401(k) plan may not result in as much tax savings under this proposed plan.
Capital gains: When comparing the capital gains rate, Biden’s plan proposes to increase this rate to ordinary income levels, but only for those whose annual income is $1,000,000 or more.
Small business: The plan also includes modifications in the Qualified Business Income deduction for small business owners and for itemized deductions for high wage earners.
Estate planning: Right now, the exclusion amount for estates and lifetime gifts is $11,580,000 for an individual (the number doubles if you are a married couple). That amount is due to revert to pre-TCJA levels of $5,790,000 in 2026, but Biden’s plan calls for that to happen immediately if his bill passes as-is. Biden’s plan also eliminates the step-up in cost basis non-qualified assets receive now upon your death. The latter change could affect anyone who inherits assets outside of a retirement plan as the beneficiaries of an estate would now be responsible for paying capital gains tax on equity-based assets that were purchased for a much lower price than their current valuations. Presently, if one inherits those same assets, the cost basis is reset to the original owner’s date of death which, in most cases, makes those large gains essentially disappear.
“When obstacles arise, you change your direction to reach your goal; you do not change your decision to get there.” Zig Ziglar
The current pandemic is a constant reminder that we cannot control everything; but what we can do is develop a plan to prepare and protect ourselves. A Democratic sweep would probably reverse a portion of the Trump administration’s tax cuts, but otherwise, both parties are attempting to keep the economy running as strong as possible with all eyes on the prize of a vaccine in 2021.
With all that said, if you have more concerns about your specific situation, please reach out to your financial advisor or tax professional to discuss any of the proposed changes mentioned above or for advice on planning techniques that can benefit you and your family before year-end. The election is still up for grabs, but regardless of who is elected, it is good practice to think ahead and prepare a strategy to help mitigate a potential tax increase for yourself or your heirs.