In 2017, President Donald Trump passed the Tax Cuts and Jobs Act (TCJA). This bill gave large corporations, small businesses, and individuals substantive tax breaks with the intention of promoting economic growth across the country. However, the former Vice President and Democratic presidential nominee, Joe Biden, is proposing a tax plan that aims to reverse several aspects of the TCJA. Though Biden would have to win the November election to pass this policy, he sees an updated tax policy as a way to increase federal tax revenues and address the worsening income and wealth inequality

The key change that Joe Biden is proposing is that the ordinary income tax bracket will be adjusted for individuals with yearly earnings that exceed $400,000. One critical yet unknown aspect of Biden’s proposed tax plan is whether this $400,000 is for a single individual or joint filers. Thus, those who exceed $400,000 in yearly income will see an increase in their tax rate to 39.6 percent. However, the income taxes for those with annual income levels under $400,000 will stay the same.

Changes to Business Taxation

Another important facet of Biden’s tax plan is that he is proposing to eliminate the Qualified Business Income (QBI) tax deduction for pass-through business owners. Business structures that will potentially be affected by this change include partnerships, LLCs, S corporations, and sole proprietors. However, this will only apply to those whose annual revenue is above $400,000. Thus, Biden’s policy will effectively increase the taxation rate for those in the highest tax bracket by 10 percent. This means that businesses with revenues above $400,000 who were eligible for the QBI deduction will go from being taxed at 29.6 percent to a rate of 39.6 percent.

Additionally, this tax plan will cap the rate at which itemized deductions can be taken to 28 percent. This will begin to affect those who are being taxed in the brackets above 28 percent. The reason for this is that the rate to determine itemized deductions would be reduced from your income tax bracket.

Retirement Planning

Biden’s tax plan also wants to implement a flat retirement contribution credit as determined by a specific percentage. Experts anticipate this percentage to be 26 percent of the contribution amount to replace deductions of those retirement account contributions. This portion of the policy lowers the financial burden for those in tax brackets under the proposed set rate. The main goal of this update is to incentivize lower-income taxpayers to contribute to tax-deferred retirement accounts. However, this bill would increase the financial burden for taxpayers in brackets over the proposed rate.

Financial advisors looking to prepare their wealthy clients for a Biden Presidential victory should accelerate income and deductions into 2020 for high-income earners. This would allow an individual to utilize the current tax rates and deductions as much as possible before increased taxation occurs.  One of the most popular ways financial advisors could achieve this goal is to utilize year-end Roth conversions so that high-income earners could forgo the 26% credit in the present for the benefit of tax-free distributions in the future.

Tax Credits for Caregivers and First-Time Homebuyers

Aside from raising taxes on those in the highest tax brackets and removing certain deductions for middle to high-income earners, Biden also wants to add tax credits for parts of the population. First, Biden wants to increase the personal income tax credits for those raising children through a higher Child Tax Credit. Under his plan, the tax credit would increase from its current rate of $2,000 for children under 17 to $3,600 for children under 6 and $3,000 for all other children under 17. Additionally, he wants to raise the Child and Dependent Care Credit from $3,000 to $8,000 for one child, and from $6,000 to $16,000 if a person or family is raising two or more children.

In an attempt to offer financial relief to those who are long-term caregivers for their parents or other family members, Biden is also proposing a new Caregiver Credit. This Caregiver Credit would provide $5,000 for informal long-term caregivers. Finally, the Democratic nominee wants to reintroduce the First-time Homebuyer Credit. This credit is a refundable and advanceable credit of up to $15,000.

Personal Investments

Biden’s tax plan also seeks to increase the long-term capital gains and qualified dividend tax rates. This would apply to individuals with incomes above $1 million. Furthermore, the plan will allow a 3.8 percent surtax on net investment income to remain in place. Additionally, the plan eliminates the 1031 Exchanges for taxpayers with annual incomes over $400,000. Financial advisors would be smart to prepare their clients on how to mitigate the impact of these proposed changes. A few ways to achieve this goal would be to target lower annual capital gains realized, use municipal bonds for their mostly tax-free character, reduce investments in the portfolio that produce dividends, take advantage of the tax deferral of investment-only variable annuities—for accredited investors, Private Placement annuities can also be a useful option—and use installment sales to regulate annual income levels, keeping them under $1 million as much as possible.

Estate Planning

Additionally, Biden’s plan looks to eliminate the step-up in basis rules. These rules apply to assets that are not under Income In Respect of a Decedent. This portion of his plan would negatively affect not only high net worth individuals but also low-income earners as well. One way that financial strategists are looking to evade this portion of the tax bill is to utilize life insurance. Taxation applies to the monies that a life insurance policy pays out. However, this tool would provide liquidity and move some of the tax burdens of the inheritance. If life insurance is not an option, another tactic people can use is a more structured sale or gifting strategy. This allows one to mitigate taxes away from the beneficiary of the inheritance.

The final characteristic of Biden’s proposal is that it would reduce the estate and gift tax exclusion by 50 percent. Thus, instead of leaving or gifting $11.58 million tax-free, you can only transfer $5.79 million before being taxed. This is only applicable to the wealthiest families. However, those affected by this change may lose hundreds of thousands to millions of dollars to taxes. Thus, financial advisors should speak with their clients about utilizing as much of their exemption in 2020 as they can. In addition to utilizing the entirety of the 2020 estate tax exemption, wealthy families, business owners, or individuals would be wise to learn about Grantor Retained Annuity Trusts (GRATs), Charitable Lead Annuity Trusts (CLATs), and sales to Intentionally Defective Grantor Trusts (IDGTs).

How Antonoplos & Associates Can Help

Tax and estate planning laws are complex. This is so no matter if you are a business owner or an individual. As such, it is important to have legal representation that can help navigate taxes and correctly set up a trust. The Antonoplos & Associates lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia. Furthermore, our attorneys are uniquely positioned to assist clients with changes presented by a Biden Presidential win. The reason for this is that our firm has experience in tax law, estate planning, business law, and real estate. With this combination of knowledge and experience, our group of attorneys can help maximize your wealth or with any legal issues that occur from Biden’s proposed tax plan.

Finally, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can effectively set up an estate plan including a variety of different wills and trusts. This allows you to maximize the tax savings you receive from setting up this account in DC, Maryland, and Virginia.

Contact our Law Office for More Information

Finally, for more information regarding preparing for a Biden presidential win, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.