How Could Biden’s Proposed Tax Plan Affect You?

By Bridgelight Financial Advisors

With a new president in office, we need to start focusing on President Biden’s proposed tax plan and how that may affect your asset and wealth management in the future. Although Biden’s proposed tax plan won’t affect your 2020 taxes, it’s important to keep in mind what’s to come in the year ahead if this new legislation passes and how it may impact American taxes.

Raising Taxes for the Wealthy

President Biden very recently stated that he is still open to pursuing a wealth tax. To help close the income gap, Biden plans for the top 1% to pay $260,000 more in taxes in the next year which represents almost 16% of their after-tax income. (1) While in his run for office, Biden proposed tax policies that included the following:

• The eradication of the step-up in basis for inherited capital assets. (2) This means more taxes on funds passed on to beneficiaries and ending favorable tax rates on capital gains for anyone making over $1 million. Assets inherited by a beneficiary would generate capital gains tax based on the asset’s original cost basis at the time of the purchase, rather than the fair market value at the time of inheritance. (3)
• Increasing the federal estate tax exemption back to pre-tax reform levels, meaning estates of wealthy individuals would succumb to the estate tax. (3) His plan would include the elimination of the $25,000 exemption from the passive loss rules for rental real estate losses acquired by middle income taxpayers. (4)
• The elimination of Section 1031 like-kind exchanges that allow postponement of capital gains taxes on exchanges of appreciated real property, disposing of rules that allow faster depreciation write-offs for certain real property, and eliminating qualified business income deductions for profitable rental real estate activities. (4)

According to the Tax Policy Center, Biden’s entire proposed tax plan would raise about $2.1 trillion over a decade.

Tax Breaks for Low and Middle Income Taxpayers

While this plan to narrow the income gap proposes to raise taxes for the rich, it also proposes to reduce taxes for the lower and middle class. This tax plan also includes the following ideas:

• Seeing out that the middle class gets a $680 tax cut amounting to 1.1% of their after-tax income, while the lower class, making less than $25,000 a year, gets a $760 cut amounting to 5.2% of their income. (3)
• The proposal to forgive student loan debt and exclude the forgiven amount from taxation. (3)
• Have the child tax credit temporarily increase from $2,000 per child to $3,000 per child within the ages of 6 to 17 and $3,600 per child for children under the age of 6. This credit would be fully refundable and Biden would eliminate the current $2,500 minimum income requirement. (3)

What Does This Mean for Us?

So, with this possible new tax plan, what does this mean for us Americans? What does this mean for retiring high net worth individuals? We are all too familiar with how taxes eat away at the money we live on, but there are some ways to feel a bit more comfortable about tax season this time next year.

• Understand and learn how to mitigate taxes on your retirement income.
• Consider ways to make your retirement savings tax free, like Roth conversions. You may pay some upfront taxes, but your savings and future growth is tax free to you and your heirs. Plus, no more required minimum distributions.
• Tax smart asset allocations. Understanding how and where to position your investments can have a meaningful impact on lowering your taxes.

Although there are other ways to reduce taxes, these are just a few that will help you maximize income and sustain your savings during your retirement years.

If you want to be proactive about tax planning and you want an advisor who understands this impact on your life savings, our team at Bridgelight Financial Advisors would love to help you experience confidence in every aspect of your financial plan. Call (203) 795-7080, email Advice@BridgelightAdvisors.com, or schedule an appointment online to meet and get started.

About Bill

Bill Leavitt is the president of Bridgelight Financial Advisors, an independent, privately owned fiduciary financial advisory and financial planning firm. He specializes in working with pre-retirees, retirees, professionals, and women investors, helping them navigate a complicated and ever-changing investment landscape. With over 25 years of experience, Bill serves his clients using his own unique financial planning model, The Wealth Focus™ Process, where he helps clients develop their customized long-term wealth strategy in four comprehensive steps. A Connecticut native, Bill resides in southern Connecticut with his wife, Laura, and their three daughters. To learn more about Bill, connect with him on LinkedIn.

(1) https://www.taxpolicycenter.org/publications/updated-analysis-former-vice-president-bidens-tax-proposals/full

(2) https://www.elliottdavis.com/impact-of-bidens-tax-plan-on-real-estate-what-we-know/

(3) https://www.kiplinger.com/taxes/602109/president-bidens-tax-plans-for-the-next-few-years

(4) https://cpaagi.com/forecast-of-what-may-be-coming-with-the-biden-tax-plan/