By Boyce F. Lowery, CLU, ChFC
The upcoming presidential election has perhaps not gotten as much attention as usual because of everything else that is going on in our country right now. Regardless, the election is going to happen in November and the nation will be choosing between former Vice President Joe Biden and our current President, Donald Trump.
After nearly four years in power, we already have a feel for how things will generally be regarding taxes if President Trump wins the election. However, a President Biden would likely usher in a period of major changes to current tax policy. He and the Democrats would push new policies and priorities and Biden could possibly sign into law many new legislative changes. As such, it behooves us to take a deeper look at his stated policies, particularly how those policies would affect your personal finances. The major changes he is proposing are tax increases related to income taxes and estate planning.
Income & Payroll Taxes
The Tax Cuts and Jobs Act of 2017 lowered the top federal income tax bracket from 39.6% to 37%. Biden wants to reverse that change and apply a 39.6% rate to all income over $400,000. He also wants to increase payroll taxes for those earning over $400,000.
Normally, the 12.4% Social Security tax is split between employee and employer with each paying 6.2%. The current Social Security tax is only applied up to a certain limit, $137,700 as of 2020. Above that limit no Social Security taxes are due. Biden would like to see workers who earn over $400,000 pay the full 6.2% on income exceeding that amount. Those earning over $400,000 would also have to pay another 1.45% toward the Medicare Hospital coverage meaning a total of 7.65% in new taxes on income over $400,000. Employers would have to match that 7.65% rate as well on all employee earnings over $400,000.
In addition, he has proposed changes to the rates at which long-term capital gains and qualified dividends are taxed. Long-term capital gains are the gains earned by investments that have been held for over one year. For those earning over $1 million, he wants to replace the current preferential 20% capital gains tax rate with the regular income tax rate at his proposed 39.6%.
Estate & Transfer Taxes
The Tax Cuts and Jobs Act also affected estate taxes, nearly doubling the estate exemption amount. Under current law, an individual can give up to $11.58 million either during life or at death without being subject to the 40% Federal estate tax. Biden would like to reverse that change and raise estate taxes back to their historical norm by lowering the exemption amount and increasing the tax rate.
Another of his proposals is to eliminate the tax benefits of investments bequeathed to heirs upon death. Currently, when an investment or piece of property is passed to an heir, it receives a step-up in tax basis to current market value at the date of death of the owner. This means that no taxes are due on the gains that are earned between the time the original owner purchases the investment and their death. The heir only pays taxes on gains earned after they inherit the investment. Biden’s proposal would tax all capital gains at death, effectively ending the step-up in basis. This would be a devastating change, even for middle income Americans.
What You Should Do About It
Even if former Vice President Joe Biden wins the election, there is no guarantee that his proposals will become law. The Democrats would have to win the Senate and maintain control of the House of Representatives to be able to achieve their legislative goals. Nevertheless, considering our current financial crisis and government spending, it is likely that taxes will have to increase at some point in the future regardless of who is in power.
It has been said that some of Biden’s changes, if enacted, could be retroactive back to January 1, 2021. That date is fast approaching, so there is no better time to review your estate planning than the present. As for retirement planning, if taxes will likely rise in the future, then it is more important than ever to have some money available down the road that won’t be subject to income taxes at all. We can show you how.
If this year has taught us anything, it is that we never know what the future holds. Change can come quickly and unexpectedly, so you should not delay. If you need help reviewing your plans for the future or would like a second opinion on how well your plans are designed to hold up in the winds of change, call us at 888-827-0146 for a free and confidential consultation.
About Boyce
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.
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(1) https://www.cnbc.com/2020/08/17/whats-ahead-for-your-taxes-if-biden-wins-the-election.html