400,000 is Biden’s Magic Number
Updated: Mar 30
President Biden is planning a range of tax increases for businesses and high-income earners to help pay for his administration’s clean energy, infrastructure and social initiatives. While it may take a couple of years to implement these measures, you should confer with your tax, legal and investment advisors this year to understand how these proposed changes might impact your portfolio, your financial goals and your legacy.
The following changes impacting individual taxpayers are considered some of the most likely to be passed by the end of 2022:
· Taking aim at high wage earners – Biden’s plan calls for rolling back tax cuts for those making more than $400,000 annually, raising the highest personal income tax rate to 39.6%. The proposal also suggests increasing payroll taxes and capping itemized deductions at 28% for those earning more than $400,000.
· Levy on estates – The 2020 estate and gift tax exemptions totaled $11.58 million per person (and twice that for a married couple). Biden’s proposal would lower the exemption by roughly 50%. Furthermore, there is a proposed estate tax rate increase from 40% to 45% on the table, as well as a measure to eliminate the step-up in basis for heirs inheriting assets with embedded gains.
· Higher capital gains tax rate – Biden has proposed an increase in the capital gains tax rate to 39.6% from 23.8% for individuals who earn more than $1 million annually. This is a pretty steep increase aimed at slowing the rate at which the wealthiest Americans continue to get wealthier through the larger size of their investment portfolios and related investment income.
· Expansion of family tax credits – These include a potential child tax credit increase from $2,000 to $3,000 ($3,600 for those under the age of 6) and a child and dependent care credit increase from $3,000 to $8,000 per dependent. Of course, the allowable tax credit would depend on the taxpayer’s income as it is meant to help low- and middle-income households.
If your household currently earns more than Biden’s magic number of $400,000 annually, there are actions you can take in anticipation of some of these measures becoming law by next year. Here are a few things to consider:
· Roth conversion – If you expect to move into a higher tax bracket next year, you could consider rolling a portion of your traditional IRA to a Roth IRA. You will be taxed at the time of conversion, but any distributions you take subsequently won’t be taxed (subject to Roth IRA withdrawal rules). Furthermore, Roth IRAs don’t have required minimum distributions and can be passed to heirs without the inheritor paying taxes on distributions either.
· Tax loss harvesting – Consider selling assets with unrealized losses to offset large capital gains during the year.
· Gifting to lower estate size – You can give up to $15,000 per year per beneficiary without incurring gift tax, so a married couple could give $30,000 per year to each child and grandchild, thereby lowering the estate size that would ultimately be inherited and taxed.
· Transferring assets to trusts – Coordinate with your estate planning team on a trust strategy to take advantage of the current (higher) estate and gift tax exemption.
· Donating appreciated assets to a DAF – Capital gains taxes potentially can be eliminated and you can receive a tax deduction for the fair market value of the asset at the time of contribution to the donor advised fund (“DAF”). https://www.insightfiduciary.com/post/tax-smart-investing-for-charity.
· Opportunity zone funds – Consider investing an expected large capital gain in an opportunity zone fund to defer paying capital gains tax and receive the tax advantaged treatment for these investments. https://www.insightfiduciary.com/post/an-opportune-time-for-opportunity-zones
· Employer strategies – If you are a high wage earner, talk to your employer about what they are doing to plan for potentially higher payroll taxes. Are stock options or RSUs a possibility for keeping salary below the $400K threshold while still compensating top employees well?
The bottom line is that under the Biden administration, we can expect federal taxes imposed on corporations and wealthy taxpayers to increase. In the meantime, maybe you can remind yourself that it is still preferable to make more money and be taxed more than it is to make less money and be taxed less. Think about it.