Recently, Melissa, Diane, and I attended some fantastic continuing education training that went over the proposed tax legislation changes that President Biden and his administration are putting forward. The budget deficit and national debt has been a challenge for quite a long time and it has been exasperated with increase in spending as a response to Covid over the last year and half. At Harford Financial Group, we know that our clients really value the holistic and comprehensive planning that we provide. One component of that is tax management. Every investment decision that one makes has a tax implication. Additionally, since we focus on retirement income planning, it is important to understand both Federal and State tax laws to determine how much of one’s pension, Social Security, and taking money out of retirement accounts and other sources of money.
Here is a summary of some of the proposed legislation. Of course, Congress must approve of any legislation so it is not clear how much will be passed and how it may be changed. Nevertheless, it is good to look ahead and think ahead.
- Increasing income taxes and payroll taxes on certain taxpayers with high incomes ($400K+) – One of the areas that is being proposed is to raise the marginal tax rates and payroll taxes for tax payers with income over $400K.
- Capping the tax benefits of itemized deductions at 28% of value for those earning $400K+
- Eliminating step up in basis – This is potentially a big change particularly for estate planning. Right now, if heirs particularly children and grandchildren of a deceased inherit non-retirement assets like property, investments or other non-qualified assets they are eligible to step up the basis for tax purposes. For instance, if mom and dad made an investment in stock in a non-retirement account for $100K and they both pass away and the value of the investments has grown to $400K, the cost basis goes from $100K to $400K. Meaning if kids sell the investment, they only pay tax on the gain on the account above $400K. Had mom and dad sold the stock while they were living, they would pay capital gains tax on the gain above $100K. Current proposals talk of eliminating this completely or limiting the amount of step up.
- Tax capital gains at ordinary income rate for those earning more than $1 million – Right now depending on one’s income, the tax on capital gains can be 0, 15, or 20% Federal. At ordinary income rate above $1 million, the ordinary income tax rate for Federal is 37%.
- Raise corporate tax rate to 28% and implement a minimum 15% corporate minimum tax
- Reducing the estate/gift, and generation skipping trust exemption from $11.7 million to $3.5 to 5 million range – Over last 15 years the value of one’s estate that might be subject to estate tax has varied dramatically. It has been as low as $1 million and one year there was no estate tax. Below the exemption limit, one’s estate does not have to pay estate tax. Above the exemption limit, every dollar above it is taxed at 45% Federal. As the limit has increased to $11.7 million it has limited the number of families it has affected. If it lowers to $3.5 to 5 million, it will affect more values. The estate includes all assets including real estate.
- Expand Social Security wage base to include income above $400K – Right now all working Americans pay 6.2% of their pay into Social Security with their company also having to match an additional 6.2%. The 6.2% applies to the first $137,700 of income one makes during the year. Above that one currently does not pay into Social Security. Everyone pays 1.45% into Medicare but there is no income limit. Medicare is paid on all income. The new proposal would then have tax payer contribute above $400K.
As we constantly work to improve, two additional areas we know our clients want guidance in addition to our focus on retirement income and health care in retirement. Those two areas are tax management and estate planning. We will continually keep doing research so that we can provide insight so that you can stay on top of these areas. Reach out to us if you have any questions.