Tax Changes Coming? Highlights of the Biden Tax Proposal
The Democrats’ sweep of the White House and both chambers of Congress means, in all likelihood, that new tax legislation will be introduced this year. Though a key component of the Biden agenda is reforming the 2017 Tax Cuts and Jobs Act (TCJA), the razor-thin Democratic majority in Congress does not ensure that all of President Biden’s proposals will be enacted this year or at all. While it is difficult to predict what changes will actually occur this year, below are some of the highlights of the Biden plan.
Changes for Individuals
The increases under the Biden plan to the individual tax rate and the payroll taxes, as well as the cap on itemized deductions, apply to those persons earning greater than $400,000 per year. The new administration’s proposal would increase the top ordinary income tax rate to 39.6%. Many of the provisions of the TCJA applicable to individuals are set to expire in 2025. However, the Biden plan would advance the sunset to a more immediate timeframe.
Changes to Long-Term Capital Gains Rates
- If Adjusted Gross Income (AGI) is less than $1 million, there is no change
- If AGI is greater than $1 million, the Biden plan proposes taxing both long-term capital gains and qualified dividends at ordinary income tax rate of 39.6% plus the 3.8%surtax on net investment income.
- Capital gains tax increase for individuals with earnings above $1 million is a near-doubling of the rate.
Changes to Retirement Accounts
- Biden’s plan would eliminate the tax deductions for contributionsto some pre-tax accounts, including IRAs, 401(K)s, and 403(b)s and replace it with a new credit equal to a specific percentage of the amount contributed (anticipated to be 26%). Highincome earners may no longer receive the full deduction.
- Individuals with a marginal income tax rate above 26% may be incentivized to avoid a traditional retirement account, and instead elect a Roth account. While the taxpayer would forgo the 26% credit in the year he or she makes the contribution to the retirement account, he or she could receive tax-free distributions from the Roth account in the future.
Changes to Gift and Estate Tax
- The lifetime exclusion, currently $11.58 million ($23.16 million for married couples) reverts back to aninflation-adjusted exemption the same as under President Obama,roughly $3.5 to 6 million for individuals. This essentially returns the estate tax to its 2018 levels, and taxes amounts in excess of this exemption at a rate equal to 45%.
- The TCJA doubled the exemption from prior levels, but the exemption is scheduled to sunset in 2026.
- The Biden plan proposes changes to the estate tax and taxing of unrealized capital gains at death, departures from the TCJA.
- Under current law, the income tax basis of a decedent’s property is stepped-up to its fair market value at death. Unrealized capital gains would be subject to federal tax at the time of death or the original cost basis will be carried forward to the beneficiary. Note that previous attempts to eliminate the basis step-up at death have been unsuccessful.
Given the potential for significant tax changes, in particular estate and gift exemptions, now might be a good time to discuss planning opportunities with your tax adviser and our wealth professionals at Madison. While specific details of the tax legislation proposal have not yet been outlined by the Biden Administration, we encourage you to consider the effects these possible changes may have on your own financial position.