President-elect Joe Biden has proposed increasing taxes on the wealthiest Americans and corporations in order to generate the massive amount of income he views necessary to bring the U.S. out of the Covid-19 induced economic decline. While there are multiple areas Biden is focusing on, the tax code is inevitably the most important part of his plan to help the nation move past its current fiscal challenges.
Back in July, Biden’s campaign released its policy document that spanned 110-pages. This plan offers some important insights into the Biden administration’s economic goals. However, it is important to note that this policy was based on the assumption that the Democrats would hold the White House, Senate, and House of Representatives. However, it looks as though the Republicans were able to maintain their majority in the Senate. Thus, while Biden will still be able to push through some of his economic policies with a divided government, he will likely have to concede on certain issues.
However, doing some financial planning ahead of time will help protect your wealth whether or not the Democrats control the three branches of government or if there is a divided government. Below are the main ways Joe Biden is looking to change the tax code and how to mitigate the effects that these changes will have on your wealth.
Individual Income and Social Security Payroll Taxes
The first part of Biden’s tax plan will increase taxes on those with yearly incomes above $400,000. The ordinary income tax rates for individuals in this top income bracket will increase from 37 percent to 39.6 percent.
A second tax increase would be aimed at shoring up the Social Security system. As of now, only the first $137,700 someone makes in a year is subject to the 6.2 percent social security tax. However, Biden wants to make it so that individuals will have to pay the tax for the first $137,700 they make plus any amount they make above $400,000. Further, any income above $400,000 will be subject to the 6.2 percent tax and employers will also be taxed the additional 6.2 percent for employees that make above $400,000. Finally, self-employed individuals must carry the 12.4 percent tax by themselves.
Tax Plan
There are a few financial planning strategies those earning over $400,000 can use to mitigate some of the extra taxes Biden is proposing. First, if you are earning over $400,000 per year, try to move up some of your expected 2021 income to 2020. This could save you tens of thousands of dollars. Further, those who are expecting to receive substantial bonuses should push to have them moved up to before the New Year to save on both the ordinary and social security income tax.
Additionally, if you have non-qualified stock options that produce ordinary income taxes when sold, try to sell these assets during 2020. This is unless you are confident that Biden’s policies will help grow your employer’s stock. However, you must believe that this stock increase will be substantial enough to outweigh the extra taxes you will incur from this transaction while also increasing your net gain.
One final way to help protect your wealth under a Biden administration is to diversify your portfolio. No one yet knows how Biden’s policies will affect the stock market, thus, tying up a substantial portion of your wealth in one company or industry could be a disaster. This philosophy is especially true for those who hold a substantial amount of their employers’ stock. Not only could someone in this situation lose their job, however, they would also see their investments fall at the same time.
Capital Gains Taxes
Capital gains are one of the most important ways that individual investors build wealth. This tax occurs when one buys a stock, bond, mutual fund, piece of real estate, or other property for one price, yet when they sell the asset, they sell it for a higher price. As both stock and real estate prices have increased significantly over the last decade, many Americans have substantial capital gains in their investment portfolios.
Additionally, if you sell a stock after owning it for less than one year from the date you purchased it, you will be subject to short-term capital gains. Short term capital gains taxes have the same rate as ordinary income. Thus, under Biden’s plan, the short-term capital gains tax could be as high as 39.6 percent. The smarter move is to hold your investment for longer than one year. The reason for this is that it will automatically lower your tax rates to 15 – 20 percent. Finally, if you earn $1 million per year, you will pay higher than ordinary tax rates on long term investments. This would effectively raise the long-term investment tax for high earners from 20 percent to 39.6 percent.
Tax Plan
To save on capital gains taxes, investors can sell some of their long-term assets in 2020 for lower tax rates. However, you should not sell your entire portfolio. Instead, only sell the assets that you would plan on selling off over the next couple of years. Additionally, it may make sense to offload investments now if you are planning on purchasing a house.
Estate Planning
In 2020, the gift and estate tax exemption are $11.58 million for an individual and $23.16 million for married couples. The 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax exemption from previous levels. These exemption levels are set to automatically expire at the end of 2025. When this occurs, the estate and gift tax exemption will lower back down to $5 million for an individual.
However, if Biden holds his electoral college lead and secures the White House, these gift and estate tax exemptions will likely lower back down to at least $5 million for an individual sooner than 2025. This is particularly likely if the Democrats also take control of the Senate. Additionally, many are concerned about the effects of Biden’s proposal for the highest earners. This tax would increase the capital gains tax rate for individuals earning over $1 million to 39.6 percent. Further, Biden is proposing to eliminate the step-up in basis provision in the tax code. This provision allows beneficiaries who sell their inherited assets quickly to largely avoid capital gains taxes.
Tax Plan
To avoid this increased tax rate, many people are gifting large amounts of money this year. However, some people are not comfortable gifting away millions of dollars at one time to their family and friends. For some people, gifting away a large percentage of their worth is not practical and may affect their lifestyle. However, some people may simply not feel comfortable seeing their lives savings cut in half. No matter if you want to increase your gifting this year to avoid higher taxation or want to hold onto your assets, it is vital to consult an estate planning attorney to create a plan anticipating these new laws.
Corporate Taxes
The last piece of Biden’s tax plan concerns corporate taxes. He plans on raising the top rate of corporate taxes from 21 percent to 28 percent. Additionally, he is planning on implementing a 15 percent tax on large corporations that have a $100 net income.
Contact our Law Office for More Information
Finally, for more information on tax moves to make during a Biden presidency, 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.