No matter whom you are voting for on November 3rd, you should consider the potential legal, financial, and tax impacts the election might have on your family’s planning. And as you’ll learn here, there are many reasons why you should start strategizing now. If you wait until after the election, it will very likely be too late.
Although the election outcome is impossible to predict, some polls show the Democrats leading over Donald Trump. And the Democrats could be poised to take a majority in both houses of Congress. Such a sweep by the Democrats will likely have far-reaching consequences on several policy fronts. But in terms of financial, tax, and estate planning, the Democrats are promising radical changes to the tax landscape, which could seriously impact your planning priorities. While it’s unlikely that a major tax bill would be immediately enacted, the new legislation could be applied retroactively to January 1st, 2021.
With that in mind, in this two-part series, we’ll outline the major ways the Democrats plan to change tax laws. Read this series so you can adapt your family’s financial and estate planning considerations accordingly. If you have any big transactions on the horizon, or if you have an estate that could be worth $1 million or more when you die, we suggest you at least start strategizing now. That way, you’ll have plenty of time to take the appropriate action before the end of the year, which will undoubtedly be a chaotic period regardless of who wins the election.
Focus on high net-worth taxpayers
The Democrat economic agenda is focused on raising $4 Trillion of new revenue by increasing taxes on individuals.
Although the Democrats won’t share specifics, Biden and Harris have said they would boost tax revenue in a handful of ways:
- Increasing the top personal income and capital gains tax rates
- Reinstating the payroll tax on higher incomes
- Returning the federal estate and gift tax exemption to prior levels
- Eliminating the step-up in cost basis on inherited investments
- Capping itemized deductions
- Increasing the corporate tax rate
Increased personal income tax rates
Starting in 2018, Trump’s Tax Cuts & Jobs Act (TCJA) reduced the top federal income tax rates on individuals from 39.6% to 37%. Biden’s tax plan would put the top income tax rate back to 39.6% on personal income over $400,000.
One of the most dramatic changes proposed under Biden’s plan involves the way capital gains are taxed. Short-term capital gains (assets held for a year or less) are taxed at the ordinary income tax rates, and under Biden’s proposal, those rates would max out at 39.6%. But the tax rates for long-term capital gains would see an even bigger hike.
Long-term capital gains (assets held for more than a year) are taxed at lower rates than short-term gains to encourage long-term investment. Those rates are currently set at 0% for individuals with annual incomes up to $40,000, 15% for incomes between $40,001 and $441,450, and max out at 20% for incomes above $441,451.
The Biden-Harris plan would create an entirely new tax bracket just for long-term capital gains. Gains for individuals with incomes higher than $1 million would be taxed at 39.6%. Therefore, if you’re making more than $1 million a year, you’d no longer see the benefit of lower capital gains rates.
Given the potential for an increased capital gains tax rate, if you earn more than $1 million a year and are considering a sale of capital-gains qualified assets, or if a sale will bump up your income, you may want to consider accelerating any large transactions, so they’re finalized before the end of the year. If this is the case for you, consult with us, along with your tax and financial advisors, soon for guidance about how to prioritize transactions to maximize your tax savings. Keep in mind, if you wait to contact us, it’s unlikely we will be able to accommodate your needs. So act now.
Increased Social Security tax on high-income earners
Biden’s plan would raise tax revenue by subjecting incomes above $400,000 to the Social Security tax. Currently, the 12.4% Social Security tax—also known as the payroll tax—applies only to the first $137,700 of your income. Earnings above that amount aren’t subject to the tax, and the cap goes up annually with inflation.
Biden proposes applying the 12.4% tax to wages and self-employment income starting at $400,001. This means the first $137,700 of your earnings will continue to be taxed at 12.4%, but you will pay no Social Security tax on additional earnings up to $400,000. However, any additional earnings exceeding $400,000 would be taxed at 12.4%.
The untaxed gap, or “doughnut hole,” on earnings between $137,700 and $400,001 would close over time with the annual increases for inflation.
If you expect a bonus or other special year-end compensation, consider arranging for the money to be paid by the end of 2020, rather than waiting until the start of 2021.
Increased estate and gift tax exposure
When it comes to estate planning, the most critical aspect of Biden’s proposed tax increases would be a major reduction in the federal gift and estate tax exemption. Starting in 2018, the TCJA doubled the gift and estate tax exemption from prior levels, increasing to $11.58 million for single taxpayers and $23.16 million for married couples. Any amounts above this exemption you give away during your lifetime or transfer upon your death are subject to a flat 40% tax.
The increased exemption amounts under the TCJA will sunset at the end of 2025. If the Democrats win, they will repeal the enhanced exemption much sooner. Biden and Harris propose to reduce the exemption back to at least the 2017 level of $5.45 million for individuals and $11.58 for couples.
Others suggest the federal gift and estate tax under Biden-Harris would return to 2009 levels when the individual exemption was set at $3.5 million, and the estate tax rate was 45%. What’s more, seeing that lawmakers have made estate tax rates retroactive in the past, these changes might be applied retroactively and go into effect as early as January 1st, 2021.
Whatever the final outcome, it’s clear that if you have assets valued between $3.5 and $11 million, you need to seriously consider taking steps now to take advantage of favorable estate-tax exemption rates that may never be seen again. To this end, you should consider opportunities to transfer assets out of your estate now to lock in the higher exemption amounts.
That said, transferring assets out of your estate can take several weeks to plan, set up, and finalize, whether done via gifting or other means. So avoid the temptation to wait until after the election to start planning. In fact, you should immediately meet with us to discuss your options and get things started.
By setting your plan in motion now, you can have your strategies in place and ready to go, so you can pull the trigger (if needed) once election results are in.
Next week, we’ll continue with part two in this series on how to prepare your estate plan in case the Democrats win the election.
This article is a service of Ruberg Law PLLC. We don’t just draft documents; we ensure you make informed, empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Planning Session during which you will get financially organized and decide what YOU want for YOUR family. You can begin by calling our office today to schedule your Planning Session at no charge.