Biden’s Tax Plan

May 2021 Newsletter | By: Ian Sachs, CFP®
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President Joe Biden introduced his third proposal last week, the American Jobs Plan. This brings the total proposed new federal spending to $6 trillion for the next decade, on top of a ~$5 trillion annual budget.

Below are key proposed changes to corporate and personal tax policy to help subsidize additional spending:

  • Income-Tax: Raise the top income-tax rate to 39.6% from 37% with no increase on the income-tax rate for families making under $400,000.
  • Capital Gains: Raise the top rate on capital gains to 43.4% from 23.8% (including the current net investment income surtax of 3.8%) for households making more than $1 million.
  • Step-Up in Basis: Repeal the step-up in basis for assets held at death such as stock, land, or a home, but include an exemption of $1 million (+$250,000 for a home) per individual.
  • Corporate Tax: Raise the corporate tax rate to 28% from 21% with a 15% minimum tax applied to corporate book income.
  • Estate Tax: Reducing the amount that someone can transfer free of estate tax to $3.5 million and the lifetime exemption for gifts to $1 million while raising the tax rate above those amounts to 45%. If left unchanged at 40%, the current estate and gift tax lifetime exemption ($11.7 million per individual in 2021) will sunset in 2025, falling back to 2017 amounts of $5 million adjusted for inflation.

This is a broad overview of proposed policy changes. Though most Americans would recognize few if any difference to their annual tax liability, everyone would be impacted indirectly. With that said, whenever there are major governmental changes on the table, it is still a good idea for people of all income levels to review their current estate and financial plans to ensure that they are addressing how they will be impacted.

Below are ideas that you can consider if the above changes become enacted by law:

  • Income-Tax: Transfer money and redirect future contributions from a Traditional IRA or 401(k) to a Roth account to allow tax-free withdrawals in retirement. Consider starting an Indexed Universal Life insurance policy to grow tax-deferred wealth with tax-free distribution opportunities.
  • Capital Gains: If you are counting on certain assets to fund short-term goals (less than 10 years), consider selling some off.
  • Step-Up in Basis: Lower your total capital-gains tax by gradually selling substantially appreciated assets and give proceeds to heirs rather than waiting until death.
  • Corporate Tax: If the 20% deduction of business income for pass-through businesses remains unchanged, a reversal in the way small businesses incorporate in the future may be worth consideration. Even with a top tax rate near 40%, pass-through entities may become more appealing.
  • Estate Tax: An Irrevocable Life Insurance Trust (ILIT) is an excellent and effective resource for providing liquidity to pay estate tax within nine months from the date of death.