It appears that Joe Biden will take the oath of office on January 20th as our nation’s 46th President. Reading his platform, proposed changes to capital gains and estate taxes could radically change planning for many. That leaves professionals like me in a position to do the impossible: make guesses about major changes next year, and advise our clients what kind of year-end planning they might consider based on his platform and those guesses.
Obviously, a President Biden would need a Democrat controlled House (he has that) and Senate (we won’t know whether this happens until sometime in January as well) to push through any proposed changes. Winning both Georgia Senate seat runoff elections would give Democrats 50 Senate seats, enabling Kamala Harris as Vice President to break any tie.
Biden’s tax platform calls for major increases to corporate tax rates as well as on personal income tax rates for those with high net incomes, which he defines as those making more than $400,000 annually. He also wants to raise the highest marginal income tax rate to 39.6% from its current 37%. Deductions may also be phased out for those making more than $400,000 annually.
If you’re affected by this, you might want to consider taking a 2020 IRA distribution, even though the SECURE Act suspended Required Minimum Distributions for 2020. Another strategy to consider is to convert traditional IRAs into a Roth, which accelerates the recognition of income tax.
Biden also wants to do away with the “step-up” in tax cost basis of assets to the date of death fair market value. Almost all beneficiaries of estates both large and small benefit from the step-up. Under current IRS rules, if you don’t know the basis of an asset, it is assumed to be zero. So if you didn’t know the tax cost basis of your mother’s home at the time of her death, and later sold it, you could face a capital gains tax on the entire net sales proceeds.
Even those not inheriting might pay more in capital gains tax and dividends, as they might pay ordinary income tax rates as opposed to lower capital gains rates. The top federal rate on these sources of income could therefore increase from 23.8% to 39.6%.
Social security and self-employment taxes might increase. Currently social security tax isn’t paid above $137,700 of earned income ($142,800 in 2021). Taxpayers making more than $400,000 might have the cap lifted, which would be a major tax increase.
Moreover, the estate tax exemptions may fall from their present highs of $11.54 million, while the estate tax rates may increase from the current highest marginal bracket at 40%. Biden’s platform called for an estate tax exemption of only $3.5 million, a 70% decrease from the current exemption. If you’ve already made more than $3.5 million of taxable gifts, under this law you will have already consumed your exemption, and your entire estate could be subject to tax at your death.
Legislation is always unpredictable, as we don’t know who bargains for what in the Congressional back offices. So what should you do about all this?
It depends on so many things and is highly individualized to your current facts and circumstances.
Please understand that I’m not making a judgment on whether these proposals are good or bad. Reasonable arguments can be made both ways on this issue. It does confirm what I’ve always said, you can’t let your estate and financial plan sit in a drawer for years and expect it to contain the best provisions for your loved ones when you become disabled or pass away. It’s a good idea to always keep up with the times.
There’s only so much that I can write about in a blog, so I’m holding a free Zoom webinar on the subject with my law partner Mike Hill. Go to floridaestateplanning.com/Bidentax to register. I hope to see you there.