With Joe Biden now president, many wonder how his proposed tax policy might impact high-net-worth individuals. Here’s an overview of a few of his proposals but remember, none of these proposals are guaranteed to become law.
On April 21, 2021, Biden announced the American Families Plan. This plan includes proposed increased taxes for wealth individuals, including a much higher capital gains rate.
Tax on the Wealthy
Biden’s plan calls for rolling back tax cuts for those who make more than $400,000 annually. He wants to raise the highest personal income tax rate back up to 39.6%. It had been lowered to 37% under the Tax Cut and Jobs Act of 2017.
The proposal would also cap the tax benefit of itemized deductions to 28% of value for those earning more than $400,000, so taxpayers earning above that amount with tax rates higher than 28% would face limitations on itemized deductions.
If you currently have lower income than normal or are anticipating potentially higher tax rates, it could be worth considering rolling over a portion of your traditional IRA to a Roth IRA, either in one year or over a period of years, as you will be taxed at the time of conversion. Any distributions you subsequently take from the Roth won’t be taxed.
You also won’t have to take a required minimum distribution from a Roth IRA. The other benefit is that, at death, if you leave your Roth IRA to a beneficiary, such as a child, that child won’t pay taxes on distributions either.
Increasing Capital Gains Tax
To calculate capital gains tax liability, realized capital gains are netted against realized capital losses. Long- and short-term capital gains can be used to offset each other. If you choose to use the tax loss harvesting strategy to offset large gains realized during the year, you may consider selling any assets with unrealized losses to lock them in.
For losses greater than your gains, it’s possible to deduct $3,000 per year against your ordinary income (for single filers, married filing jointly or head of household filers) and carry the excess losses forward to future years.
Reducing Estate & Gift Tax Exemption; Increasing Estate Tax
The 2021 estate and gift tax exemption amounts is $11.7 million per person (double that for a married couple). Biden is proposing that the estate and gift tax exemptions be reduced. According to the Tax Foundation, as of October 2020, the proposed estate tax exemption would be lowered to $3.5 million and the gift tax exemption would be reduced to $1 million. Some are concerned that Biden will accelerate the 2025 sunset provision on current exemptions.
In addition, the estate tax is proposed to increase from 40% to 45%. If you have sufficient assets to meet your living expenses, you might consider making gifts now to work toward the current lifetime exemption amount sunsetting in 2025 or potential accelerated reduction under the Biden proposal.
Per the IRS, each individual can give up to $15,000 per year per beneficiary without cutting into the lifetime gift tax exemption amount. You can also choose to put gifts into an irrevocable trust to receive distributions over your lifetime or for your beneficiaries but making that gift likely comes at the cost of not having further control over the asset.
You might also consider charitable giving through vehicles such as a donor-advised fund, which gives you an immediate tax deduction while you take time to decide the eligible charities to which you want to transfer some of your wealth.
Changes to the Child Tax Credit
At the end of 2021, the child tax credit of $3,600 per child under age 6 and $3,000 per child ages 6 to 17 will expire. right now, it’s fully refundable and payable in advance. In 2022, it will revert to $2,000 per child under age 17 unless extended by legislation. Biden does propose extending the credit through 2025 and make its refundability and advance payment features permanent.
Increased IRS Auditing
Years of underfunding the IRS has led to reduced auditing. The Biden proposal would increase IRS funding to help ensure corporations and high-net- worth individuals comply with tax law.
Time Will Tell on Tax Policy
The Urban-Brookings Tax Policy Center says it assumes that implementation of most of Biden’s proposals might be delayed until 2022, but only time will tell.
Consider Meeting With Your Wealth Advisor
In the meantime, it may be a good time to review your wealth plan, especially if it’s been a few years. At Mariner Wealth Advisors, your wealth advisor collaborates with in-house tax, insurance, estate planning and trust services teams to take a 360° view of your finances and to offer advice on how to minimize the impact of taxes with a goal of protecting your wealth and allowing you to leave a legacy.
“Businesses, Wealthy Brace for Biden Tax Hikes,” thehill.com.
“Details and Analysis of President-Elect Joe Biden’s Tax Plan,” taxfoundation. org.
“Frequently Asked Questions on Gift Tax,” irs.gov.
“Biden’s Tax Plan: What’s Enacted, What’s Proposed,” investopedia.com
Some services listed in this piece are provided by affiliates of MWA and are subject to additional fees. Additional fees may also apply for tax planning and preparation services.
The tax laws discussed are proposed at this time and any final laws or regulations passed may vary significantly from the proposed. Tax laws and regulations are complex and subject to change, and MWA cannot guarantee that the information herein is accurate, complete, or timely.
The views expressed regarding IRA Rollovers are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be a solicitation to buy or sell or engage in a particular investment strategy. Before initiating a rollover, please consult with a financial or tax professional.
The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Platform Solutions does not warrant the accuracy of the information.
Investment advisory services provided through Mariner Platform Solutions, LLC (“MPS”). MPS is an investment adviser registered with the SEC, headquartered in Overland Park, Kansas. Registration of an investment advisor does not imply a certain level of skill or training. MPS is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MPS transacts business and maintains clients. MPS is either notice filed or qualifies for an exemption or exclusion from notice filing requirements in those states. Any subsequent, direct communication by MPS with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MPS, including fees and services, please contact MPS or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you invest or send money.