Regulatory and Industry News Alerts from Armanino

How Biden’s Tax Proposals Impact High Income and High-Net-Worth Individuals

by Kelly Gillette
January 28, 2021

President Biden’s tax proposals suggest significant changes directly aimed at individuals and families with higher incomes and wealth. Given the results of the Georgia Senate runoff elections, which had Democratic winners, changes to the gift and estate taxes are even more likely now that the Democrats have control of both the Senate and House of Representatives.

Below are the most frequently asked questions about what these tax changes may entail:

When Will These Changes Take Place?

No one knows when the effective date will be on the potential changes, and this could have a dramatic impact on planning. Some experts do not see this happening before 2022. But by the time we know for sure, it may be too late to implement tax minimization strategies available under the current tax law.

Can Congress Make the Changes Retroactive?

To be effective retroactively, the tax law must be rationally related to a legitimate legislative purpose. Congress could consider attaching some of these changes to the bailout legislation that President Biden wants to pass. This approach is not unprecedented. So the sooner you complete your planning, the better the likelihood that you can avoid a tax legislation effective date that may negatively impact your desired outcome.

Does This Really Affect Me?

The majority of these proposed changes will most likely affect higher income households (over $400,000) and those with significant net worth. Connect with your advisor to determine what changes may affect you and how we can help.

What Should I Do Now?

With the White House, Senate and House of Representatives now under Democratic control and a large use of deficit spending needed to stimulate the economy during the COVID-19 pandemic, you should plan for higher taxes in the near future. Many wealthy individuals have already started preparing for one of the most impactful areas – estate tax planning.

Don’t Wait to Formulate Your Plan.

You need time to analyze various planning scenarios and select the best option with your advisors before new laws are put into place. Although these are the proposals, and we don’t yet have all the details, the new administration could push some of these changes through quickly. With the election over and 2021 already here, now is the time to be proactive in planning for income taxes, as well as transferring wealth.

Below, we compare some of the more significant tax policy items that are slated for change during the Biden administration:

Tax Policy Issue Current Law Biden Proposals
Tax Rate on Ordinary Income Top marginal rate is 37% until 2026 (if current law expires, top marginal rate reverts to 39.6% beginning in 2026) Restore top marginal rate to 39.6% for taxpayers with over $400,000 of taxable income (it’s not clear as to how this relates to filing status)
Tax Rate on Long-Term Capital Gains & Qualified Dividends 0% (income between $0 and $40,000)
15% (income between $40,001 and $441,450)
20% (income above $441,450)
Tax capital gains and dividends at 39.6% for taxpayers with over $1 million of taxable income (and potentially for all taxpayers)
Tax Rate on Carried Interests If held at least 3 years, taxed at long-term capital gain rates Taxed as ordinary income
Itemized Deduction Cap Itemized deduction limit repealed (the current law expires in 2026 and the “Pease” limitation is reinstated) Cap value of itemized deduction at 28% (rather than the then top 39.6%), and reinstate the Pease limitation for those with income above $400,000
High-Income Social Security Payroll Tax No Social Security payroll tax on income above $137,700 in 2020 (indexed) Impose the 12.4% (6.2% for the employer and 6.2% for the employee) Social Security payroll tax on income in excess of $400,000
Pass-Through Trade/Business Income (§ 199A) 20% deduction Implement a new phaseout for income over $400,000
§1031 Like Kind Exchange Available for real property used in trade or business, or held for investment Eliminate §1031 for taxpayers earning over $400,000 in income
Estate and Gift Tax
  • Basic exclusion is $11.58 million in 2020 (continued indexing); expires at the end of 2025
  • 40% rate for estate, gift and generation-skipping tax
  • Step-up in basis at death
  • Return the exclusion back to 2009 levels of $3.5 million for estate and $1 million for gift (may end up at $5 million)
  • Return the tax rate back to 2009 levels (45% rate)
  • Repeal stepped-up basis at death
GILTI Rate 10.5% rate Double rate to 21%

If you have any questions or need help, contact our experts.

January 28, 2021

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