Disclaimer: We know that by sharing this blog post addressing politics, policy, and investing, it may seem like Sterling Retirement leans towards a specific side of the aisle. However, please note that Sterling, and this post, is not commenting on, supporting, or endorsing any one political party or candidate.
With the successful inauguration of the 46th President of the United States, Joseph R. Biden, now behind us, all eyes have turned toward policy and what changes might be coming.
We now know what the political landscape of Washington will look like for the foreseeable future:
Office of the President –> Democrat controlled
U.S. House of Representatives –> Democrat majority
U.S Senate –> Democrat majority
With the Democratic party holding majority control over Congress, and with a Democratic President in office, the likelihood of changes to existing legislation is fairly high. However, due to the razor-thin majority that is being held in the Senate, President Biden is unlikely to receive 60 votes (the amount currently needed to avoid a Senate filibuster) for his more contentious policies and thus will likely only be able to enact some of the proposed changes.
We would like to address one of the more contentious policy topics out there — President Biden’s proposed tax plan. To that end, we want to remind everyone that this is a proposed plan, to which nothing has been signed into law and the likelihood of the entire proposal being enacted “as-is” is very small. We want to simply discuss the facts of what is currently on the table[1]:
- Ordinary Tax Bracket Rates:
- President Biden has continually pledged not to raise tax rates for those with incomes below $400,000.
- For those with incomes over $400,000; the proposed plan is to increase the top Federal marginal tax rate to the pre-TCJA (Tax Cuts and Jobs Act) level of 39.6%.
- The TCJA was a 2017 bill signed by President Trump that made several significant changes to individual and corporate taxes. As a reminder, the TCJA changes were already set to expire in 2026 (assuming no further changes to the bill were passed) based on language from the original 2017 legislation.
- Capital Gains Tax Preferences:
- President Biden has proposed that long term capital gains and qualified dividends would be taxed at the top marginal income bracket (39.6%) for those with incomes in excess of $1 million.
- The proposal would phase out the Qualified Business Income deduction for those with taxable income over $400,000.
- It is also proposed to cap the itemized deduction tax benefit at 28% for those earning more than $400,000.
- Removal of the Social Security Tax Cap
- President Biden’s tax plan proposes the removal of the income cap for OASDI (social security old age, survivors and disability insurance) tax which currently sits at $142,800. The proposal would also impose this 12.4% tax, that is split equally between employers and employees, on income above $400,000. To restate this point; the proposal would leave the income cap for OASDI taxes unchanged (and capped at $142,800 for 2021) for those with less than $400,000 of income.
- It’s important to note that this proposal would likely require 60 Senate votes to pass due to the “Byrd Rule” which seems unlikely in the current environment.
- Changes to Retirement Account Deductions:
- The current proposal would change, but not eliminate, the way pre-tax contributions to IRAs, 401(k)s, 403(b)s, etc. work today. Under current law, pre-tax contributions are treated as a reduction to income, meaning that they are more beneficial to those in higher tax brackets. Instead of a deduction to income, the current proposal would provide a standardized tax credit (expected to be ~26%). The goal of this change is to equalize the tax benefit across all income levels rather than providing a higher tax benefit to those in higher tax brackets.
- Estates, Gifts, Trust Changes:
- President Biden has proposed to eliminate the basis step-up rule currently in existence today which “steps-up” the income tax basis of property held by a decedent to the fair market value of the asset on the date of death.
- It is still unclear how the tax treatment would work for inherited assets under this proposal. That being said, it’s important to note that previous attempts to change this specific estate planning legislation by other administrations have all failed.
- The TCJA doubled the estate and gift tax exemption to $11.8 million per individual and $23,16 million per married couple. As mentioned earlier in this article, these increased exemptions were expected to “sunset” in 2026 and President Biden has proposed to reinstate the $5 million exemption which was in place prior to the enactment of the TCJA.[2]
- President Biden has proposed to eliminate the basis step-up rule currently in existence today which “steps-up” the income tax basis of property held by a decedent to the fair market value of the asset on the date of death.
It’s entirely possible that none of the above referenced proposals will actually be enacted into law, however, historical precedent suggests that at least some of the proposal will be signed into law with the Democrats controlling the Presidency and a majority in Congress.
So what’s the takeaway? The immediate takeaway we want to get across is to ignore the noise and media coverage. We want to reiterate that these are proposals and not laws. At Sterling, our job is to help you sift through the noise and provide impartial guidance and planning for your specific situation.
We want you to know that our team is continually monitoring the changes coming from Washington (this includes any additional proposals that have been brought forward by other members of Congress) and will work with you to discuss, modify, or continue on your current path should legislation be passed that has direct impact to you. We thank you for allowing us to be your partner and your advocate as we continue down the path to financial wellness and independence together.
-Steve, Meg, Luke, and the entire Sterling Team.
[1] https://joebiden.com/two-tax-policies/
[2] https://taxfoundation.org/joe-biden-tax-plan-2020/
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
