Biden Tax Plan(ning)

This insight will be updated when the new tax plan passes and is in effect.

I. Introduction

When President Biden ran for office, he proposed a tax plan that is designed to raise four trillion dollars of government revenue, coming largely from wealthy individuals, families, and businesses. Unified Democratic control in D.C. means there is an increased likelihood of major tax reform. Without proper planning, these revisions to the tax code could derail a retirement plan, an estate transfer, or general wealth accumulation and preservation. As such, it is important to review these possibilities and make informed decisions about any adjustments to one’s finances.

Because of the impending material modifications to our federal tax code, many traditional methods of saving for common financial goals could become substantially less efficient, and therefore, it is important to obtain updated professional advice to minimize the impact of these changes on one’s own financial plan.

II. Tax Categories, Vulnerable to Change

There are several broad categories of taxation that are ripe for adjustment under the new administration. Three of these categories are income and capital gains taxes, estate taxes, and corporate taxes.

Income and capital gains taxes
Like his democratic predecessor’s tax plan, the Biden administration is proposing a top marginal rate of 39.7% for individuals. Additionally, Biden has also proposed phasing out the FICA tax exemption. This means that over time, ordinary income amounts above $142,800 (in 2021) will gradually become subject to FICA taxes. This effectively raises high earners’ tax brackets by adding 7.65% (or 15.3% for the self-employed) to more dollars above the regressive $142,800 limit.

Capital gains, which are already subject to an additional 3.8% Net Investment Income Tax (NIIT) on income above certain thresholds, are also under review. Whether there is a movement toward treating long-term capital gains as ordinary income, or toward prolonging the one-year holding period to reduce the amount of capital gains treated as long-term, capital gains taxes are likely to shift in the near future, as well. Another consideration is how capital gains are treated for estate purposes, as repealing the step-up in basis or taxing capital gains at death have been proposed.

Estate taxes
One can expect revision to the estate tax provisions, including rates, credits, and exemptions. While the estate tax credit in 2021 covers a net worth of $11.7 million per individual (or $23.4 million for a married couple), this will likely come down considerably. This means that transfers of a smaller net worth will be subject to the roughly 40% federal estate tax above the exemption. While it’s anybody’s guess as to the exact amount, a $3.5 million net worth estate tax exemption is a fair estimate for now.

A sizeable estate asset transfer now could include a considerable estate liability transfer. This is especially true for those whose estate consists largely of real estate or other illiquid assets. For example, if a $6.5 million estate is passed to the next generation under these conditions, $3 million of that would be subject to a roughly $1,200,000 estate tax. If that net worth is tied up in real property, the beneficiary has no means to pay the estate tax outside of selling property, or writing their own $1.2 million check to Uncle Sam.

Corporate taxes
Roughly half of Americans either own or work for a small business, defined as a company with fewer than 500 total employees. When the corporate tax rate reverts back to 28%, that additional 7% corporate tax will need to come from somewhere on the company’s balance sheet. This may be even more challenging to do for some companies if there is a revision to the 199A deduction for qualified business income, as proposed. Finally, labor laws concerning independent contractors, such as Uber and Lyft drivers, may be revised.

III. What Now?

For every update that raises taxes, reduces exemptions, or curtails incentives to certain investments, there is a way to mitigate their effects on one’s own financial plan. Whether this is through a new open door that promotes an innovative way for investors to save, or through the more efficient use of existing investments, a personalized financial blueprint and a professional investment policy statement are key to achieving one’s financial goals. If one or both of these is lacking in your financial picture, perhaps now is the time to get started.

IV. The Bottom Line

If you are reading this, odds are that you, your family, or your business will be in some way affected by the Biden administration’s tax changes. Your ability to recognize and adapt to these updates is critical to achieving the financial success for which you work so hard. At Burnham Gibson, our advisors have relationships with several CPAs, estate attorneys, and other professionals to ensure our clients are on the right path in all financial planning facets. As such, they and their plans are well taken care of, regardless of administration.

Are you?


This educational article appears on this website solely on behalf of Burnham Gibson Wealth Advisors, LLC. (BGWA), a registered investment adviser. It does not represent the business or offerings of Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) or any of its affiliates, and none represent or guarantee the accuracy or applicability of this content. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates and associates do not provide tax or legal advice or services.


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