I have to decide between my two children, who should be my power of attorney…
The Biden Harris Administration’s new tax plan will likely affect those in higher-income households, which means you may need to make some adjustments to your financial legacy. Generally speaking, the sweeping changes to the tax code will aim to levy higher taxes on corporations and high-income households. It will also overhaul how wealthy families transfer assets to heirs. Whether or not his tax reform and economic agenda will be put in place is ultimately down to which party controls the US Senate. With a Biden 7 trillion dollar plan to rebuild the shattered COVID-19 American economy, it all comes down to two Senate runoffs on January 5, 2021, in Georgia.
The tax plan’s components include raising the top individual income tax rate from 37 percent to 39.6 percent. The plan also seeks to extend the 12.4 percent shared employer/employee Social Security tax capped at 137,700 to earnings over 400,000 dollars. Under a Biden Administration, the capital gains tax rate will rise to 39.6 percent for taxpayers with income over one million dollars. This rate hike is up from the current long-term capital gains rate of up to 20 percent for wealthy investors.
President-elect Biden is also proposing to overhaul taxes around wealth transfers. He would eliminate the step-up in basis to the date of death valuation of inheritable equity assets. Instead, any unrealized capital gains will become subject to taxation. If Biden has his way, there will also be a reduction in the amount an individual can transfer free of estate and gift taxes. The currently permissible 11.58 million dollars will be reduced to 3.5 million in bequeaths upon death and a cap of one million dollars in lifetime gifts.
Politically, if Democrats cannot regain control over the Senate, many of the aforementioned Biden Harris proposals will be untenable. Nevertheless, some portions of Biden’s tax and economic reform may garner support from GOP lawmakers. Senators like Marco Rubio (R-FL) and Mike Lee (R-UT) have, in the past, been in support of child tax credit expansion. This previous support will bode well for the Biden proposal for a temporary increase of the child tax credit to 3000 dollars for children under age 17 and a 600 dollar bonus for children under the age of six. There is also sentiment for raising the corporate tax rate, which Biden wants to increase from 21 to 28 percent if lawmakers work together to replenish federal coffers. Republicans find it easier to raise corporate tax than taxes on wealthier individuals.
Additionally, a closely divided Congress may find it more expedient to increase IRS funding to pursue larger, more monetarily beneficial targets. These targets might include corporations or high wealth individuals; rather than draft and pass new tax legislation, it will likely prove to be a contentious process. American taxpayers would also probably prefer this approach to a more dramatic income tax increase. According to the Taxpayer Advocate Service (an IRS agency watchdog), IRS appropriations and employee numbers fell by more than 20 percent between fiscal years 2010 to 2019.
The year 2020 continues to bring new and challenging uncertainties to taxation, retirement, and legacy planning. Biden tax reform plans may significantly impact how families approach wealth building and inheritable asset transfer with minimal tax consequences, particularly if a nearly divided Congress opts to use the power of the IRS as an expedient arm of the federal government for improved tax base revenues. In this case, all Americans must watch what proposals are enacted into law and make their adjustments accordingly to preserve their assets.
We help families plan to protect and transfer wealth on to their loved ones. If you have questions or would like to discuss your particular situation, please don’t hesitate to reach out. If you’d like to discuss ways we can help, please contact our office at 973-226-0050.