Many people focus on market response surrounding an election year, which I’ve addressed in a prior post. But I’m much more interested about the impacts and opportunities related to financial planning. Given tax season is around the corner, here are a handful of tax-related planning considerations that could change as an outcome of the election.
Income Tax Rates
Current law has the top Federal rate of 37%
beginning at $518,400 for single taxpayers and $622,050 if married filing jointly. Biden has proposed rates return to 39.6% (which was the top rate prior to Trump’s Tax Cuts and Jobs Act). This rate would be imposed on those earning $400,000+.
Long-Term Capital Gains and Qualified Dividends
Current law has a maximum qualified and long-term gains rate of 20%
. For those with investment income and modified adjust gross income of $200k+/individuals and $250k married there is an additional 3.8% Net Investment Income Tax. Biden has proposed gains and qualified dividends be taxed at the ordinary income rate of 39.6% for those with income in excess of $1M. In addition, the net investment income tax would also remain in place. In addition, real estate investors may be impacted to changes related to 1031 exchanges
. Under current law, you may defer capital gains tax upon the sale of an investment property if you promptly purchase a “like-kind” property. Trump would like to expand this notion by continuing the Opportunity Zone program
which was created under the Tax Cuts and Jobs Act.
This program worked similarly to a 1031 exchange if invested purchased property in areas deemed economically distressed. I’ve personally seen this program work wonders in my hometown of Kingston, NY. Biden has proposed eliminating the deferral of capital gains tax through 1031 exchanges for those with income over $400,000. He would also likely let the Opportunity Zone program wind down and expire
Social Security Tax
It’s no secret changes need to happen within the social security program in order for it to remain solvent. Currently a payroll tax is withheld on wages up to $137,700, a limit which is increased by inflation annually. Trump recently proposed to have Social Security paid through the general tax fund
rather than payroll tax. Biden is proposing a donut hole solution. For many, current law would remain as-is. But for those with higher wages the tax would be again assessed once income exceeded $400,000.
The “Pease Limitation” reduced the value of itemized deductions for high income taxpayers. This general limitation was lifted under the Tax Cuts and Jobs Act, but specific limits remain in place for some of the most popular deductions. These specific limitations include medical deductions, SALT taxes (state and local taxes), mortgage interest deductions and charitable contributions. Biden has not proposed any changes on these matters, but has proposed increasing tax credits related to child care. Right now, a taxpayer can claim $3,000 of child care expenses (up to $6,000 max). Biden is proposing to increase this amount to $8,000 per child ($16,000 max).
Estate Tax Exemption Amount
The estate tax exemption is at an all time high of $11,580,000 per person, which means couples have $23,160,000 of net worth sheltered from estate tax. For those exceeding these amounts, a hefty estate tax of 40% is assessed. Given the high hurdle, this isn’t something most people have to worry about. However, keep in mind that there are other taxes due on inherited property which affected the masses. Distributions from inherited IRAs and annuities generate ordinary income tax to the beneficiary. In addition, many states also assess their own estate tax which are triggered at much lower thresholds but at least have a more reasonable tax rate. For instance, Massachusetts triggers an estate tax at $1,000,000
(on the whole estate, not just $1M+) with rates up to 16%. Biden is proposing to bring the estate tax exemption down to $5,500,000 per person ($11,000,000 for a couple) and to increase the 40% rate.
Non-retirement accounts and most property receives what’s called a “step up in basis” when inherited. I find an example to be the best method of explanation. Assume your parent purchased Apple stock for $2/share in 2005. Your parent passes away in 2020 with the stock share now valued at $102. That’s a $100 per share gain that would have been subject to the capital gains tax if your parent decided to sell it the day before their passing. However, because it’s in a non-retirement account and they passed owning the stock, you’ll inherit it with a “step up in basis.” This means, if you sold it a year later at $112/share, you’d only be paying a gains tax on $10/share rather than $110/share. The same idea applies to highly appreciated homes that a family may sell after the passing of a relative. Trump, so far, has let this tax law continue as-is. Biden is proposing to eliminate it
to generate more tax revenue upon the sale of inherited property.