We wanted to summarize some of the key elements of Joe Biden’s proposed tax plan for you.  There are many changes that would be made if his plan were to fully or even partially get approved.  If approved, a lot of our clients would be impacted in some way.   For example, the Child Tax Credit could go from $6,000 for two or more children all the way up to $16,000.  You may have also heard quite a lot of talk about the $400,000 income limit.  It’s true!  A lot of thresholds in the plan begin there, starting with the proposed top marginal tax rate going to 39.6% for those who make over $400,000.  That and more in our summary of President-elect Biden’s tax plan:

What are the main proposals of Joe Biden’s Tax Plan?

Raising the top marginal tax rate to 39.6% from 37% now for income over $400,000/year. 

• This change is already scheduled to change in 2026 when the Tax Cuts and Jobs Act expires, therefore, Biden would be advancing it.
• Single filers currently sit in the 35% tax bracket at $400k/year while Joint filers sit at 32%. 

Elimination of the Qualified Business Income (QBI) deduction for anyone making over $400,000/year.

• Learn more about QBI here.

Taxing capital gains and qualified dividends for incomes over $1 million at the higher 39.6% ordinary income tax rate.

• This would only apply to dollars that exceed the $1 million mark.  As an example, if I make $800,000 in ordinary income and $300,000 in long-term capital gains; my total income is $1,100,000.  Therefore, $200,000 of my $300,000 would be taxed at the capital gains rate and the remaining $100,000 would be taxed at the higher 39.6% rate.

Capping itemized deductions at 28% of income.

• This only impacts those who itemize deductions.  An increase in the standard deduction led to 90% of Americans claiming a standard deduction rather than itemize.
• This could significantly impact those in the 32% tax bracket or higher.   

Increasing tax credits for middle- to low-income households.

• These credits include increasing the Child Tax Credit to $3,600 per child under 6 and $3,000 for all other children under 17.  The Child and Dependent Care Credit is currently maxed out at $3,000 for one child, and $6,000 for two or more children.  This would be expanded to a refundable credit of $8,000 for one child, and $16,000 credit for two or more children.  A First-time Homebuyer Credit would provide a new refundable and advanceable credit of up to $15,000.  Another new credit available would be for those who provide informal care to those in need of long-term care, up to $5,000. 

Collecting additional payroll taxes for Social Security after $400,000 of income.

• Income above $400,000 would be subject to the 12.4 percent Social Security tax, which would be split evenly between employees and employers (or fully contributed by those who pay self employment tax). Currently, there is a wage cap of $137,700 ($142,800 in 2021).  Therefore, there would be a ‘gap’ between the $142,800 mark and $400,000 where you wouldn’t be paying any additional Social Security tax.

Lowering the federal estate tax exemption by 50% or more and eliminating the “stepped-up” basis on transfers of appreciated property at death.

• Under current law, when an investor leaves an asset to an heir, the value of the investment resets to the market value at the time of death, effectively erasing any taxable gains earned since the original purchase. 

• The tax exemption amount is currently $11.58 million per individual.  Even if this were cut by half, that's $5.79 million per individual.  It's an amount most Americans don't have to lose sleep over.
• As far as the removal of a step up in basis, this will be the third attempt at eliminating this.  It's widely unpopular for financial institutions who usually bear the brunt of tracking down cost basis for their clients.  Details would need to be hashed out considerably for such a change to take place.    

Changing the tax deduction for 401(k) contributions to a tax credit (this has been discussed, but there are no formal proposals).

• This proposal is to help equalize the incentive to save for retirement.  For those in a higher tax bracket, their retirement plan deduction is worth more than those in a lower tax bracket.  
  

What’s the likelihood that all of this gets passed?

Slim to none.  When Biden takes control of the White House, he will still need to get Congress to pass his proposals.  The House of Representatives will remain under the control of the Democrats.  The Senate is still up for grabs with run-off elections to take place in January.  If Republicans maintain their majority, we have a divided Congress.  Even if Democrats win a majority in the Senate, it’s still unlikely all of these proposals make it through since the party isn’t in unanimously in favor of everything.

What moves should I make before the year ends?

Do what you planned on doing.  Do not make alterations to your plan based on the idea of these proposals going through.  We have no idea what, if any, will get instated. 

As you can see, we are monitoring the situation.  Dan and I do not plan on altering our own financial plan at this point.  When and if the proposals are granted, we will then assess what we and our clients need to do.  

If you’re reading this thinking you didn’t even have a plan established for 2020, let alone 2021, it’s time to get serious about your finances.  Contact us today to start prioritizing your financial plan into your life plan.  

- Natalie

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