In this video, I walk through Biden’s proposed tax changes and some planning opportunities if each of them became law. It’s important to note the likelihood of passage of any of these proposals is small at the current moment given that control of the Senate is still up for a runoff in Georgia, and that the proposals are from the Executive branch vs the Legislative branch where laws are actually made!
Here’s a bullet point summary:
- Significant changes for those earning over ~400k – both on the tax rate side and on tax deductions:
- Top tax bracket back to 39.6% (as it was in the Obama years), but now applies to taxable income over 400k (whether single or married filer) – net impact +2.6-4.6%
- Wage earnings above 400k (per earner) would be subject to FICA again, whereas it phases out at 137k now – net impact +6.2%
- QBI deduction (20% reduction on business income) above 400k – net impact +10-11.6% (was previously 80% of 37% = 29.6% effective marginal rate)
- Cap the value of itemized deductions at 28% – net impact +11.6% on deductible expenses
Planning strategies – to the extent possible, pull income and deductions forward to be taxed at a lower marginal rate and to preserve deductions
- Other proposals:
- Long Term Capital Gains with income over $1m would be subject to ordinary tax rates (i.e. 39.6% vs 23.8% previously)
- Tax deferral on 1031 exchanges eliminated if income over 400k
- Flat tax credit to replace reduction in taxable income from traditional retirement account contributions
Planning strategies – manage controllable income for capital gains and losses and sales of real estate where possible. On retirement contributions, you should compare your current and future projected tax rates to the 26% proposed cap. We would try to determine whether it’s worth taking a 26% credit now compared to paying a higher rate in the future combined with today’s rate. Higher income taxpayers would likely be better with a Roth account whereas lower income earners would likely be better off with a traditional account and a 26% tax benefit. I’d be more than happy to talk through the nuances of this with you!
Here’s a link to the Michael Kitces summary I mentioned.