Probably and Potentially Quite a Bit – read on
Below are some questions that you should review as Biden’s proposed tax plan might have dramatic implications for you and your family.
Do you make pre-tax contributions to traditional retirement accounts (e.g., a 401(k) or IRA)?
- Current law, your contributions are deductible, dollar for dollar, up to your annual limit.
- Under Biden’s tax plan, you would instead receive a flat credit for contributions, capped at a rate of 26%. This hurts people in higher tax brackets. For example: A taxpayer in the 37% tax bracket would only receive an equivalent deduction at a 20.5% marginal tax rate, rather than a deduction at a 37% marginal tax rate they receive under current law.
Do you hold appreciated assets with a low cost basis (excluding pre-tax assets such as IRAs, most annuities, and other items of income in respect of a decedent)?
- Current law, if you hold the assets until your death, they will receive a step-up in basis to the FMV on your date of death. This effectively eliminates the unrecognized capital gains.
- Under Biden’s tax plan, the step-up in basis would be eliminated. This could result in your heirs taking carryover basis, or a recognition event at death.
Do you earn wages in excess of $400,000?
- Current law, wages up to the taxable maximum ($142,800 in 2021) are subject to Social Security payroll tax. This tax is 12.4% total, typically split evenly by you and your employer.
- Under Biden’s tax plan, the taxable maximum would remain in place; however, when wages exceed $400,000, they would again become subject to Social Security payroll tax. This creates a “donut hole” in the payroll tax scheme (wages between the taxable maximum and $400,000 would not be subject to Social Security payroll tax). So those above $400,000 are then subject to Social Security Tax.
Does your household income exceed $400,000?
- You would be in a new tax bracket, with increased rates. The top rate would revert to the pre-TCJA (Tax Cuts and Jobs Act) rate of 39.6%.
- You would no longer be eligible for a 1031 exchange.
- If you itemize, your deductions would be capped at 28% of their value. Further, the Pease limitation (repealed by the TCJA) would be reinstated, capping certain itemized deductions (e.g., mortgage interest, state and local taxes, charitable contributions, etc.).
- If you are a pass-through business owner, the QBI deduction would be phased out.
Does your household income exceed $1,000,000?
- Current law, long-term capital gains and qualified dividends are taxed at preferential capital gains rates. This rate is now capped at 20%.
- Under Biden’s tax plan, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates.
Does the value of your estate exceed $3.5 million (or $7 million, if you are married)?
- Current law, the federal estate and gift tax exemption amount is $11.7 million per person ($23.4 million for a married couple). This amount can pass federal estate tax-free at your death, reduced by any lifetime use of your exemption.
- Under Biden’s tax plan, this exemption amount would be reduced. The new exemption could be as low as $3.5 million per person, or revert to the pre-TCJA amount of $5 million per person (indexed for inflation).
- In addition, Biden’s tax plan would increase the federal estate and gift tax rate from 40% to 45%.
Are you a small business owner?
- Some potentially positive news, Biden’s tax plan would offer credits for adopting workplace retirement savings plans.
Are you an informal caregiver for an individual in need of long-term care services?
- If so, under Biden’s tax plan, you could be eligible for a new caregiver credit of up to $5,000.
Do you have significant corporate ownership interests?
- The federal corporate tax rate would increase from 21% to 28%.
- A 15% minimum tax would apply to corporations with book income of $100 million or more.
- If the corporation sends manufacturing and service jobs to foreign nations in order to market goods or services domestically, a 10% surtax would apply.
- The global intangible low-taxed income rate would double, and it would apply on a country-by-country basis.
- A new “Made in America” tax credit of 10% would be available for qualifying expenses.
As always, it’s important to talk with a tax professional to ensure you are making the best decision for your own particular situation.
-Paul R. Rossi, CFA