In early October, Evelyn Zohlen, MBA, MS, CFP® discussed what tax policy under a change in administration could mean for earners with income over $400,000 (click here to read more). As we charge towards election day, it feels only right to continue the conversation on what tax policy could look like for individuals in 2021 and beyond.
Donald Trump campaigns for further cuts to tax rates that would benefit middle-class taxpayers and seeks to cut capital gains rates by 15% while also indexing recognized gains for inflation. Other than these major changes, his main intent is to extend current tax policy provisions past 2025, when they are currently targeted to sunset.
Considering Joe Biden’s tax policy proposals include changes in nearly every facet of current policy, we’ll spend the bulk of this blog tackling key elements of interest to individual taxpayers (but don’t forget to check out Evelyn’s blog first to get foundational details!).
Itemized Deductions- Biden proposes a cap on itemized deductions to a 28% benefit, however the exact calculation is still unclear. In conjunction, Biden is also campaigning to restore the 3% Pease limitation, which reduces itemized deductions in 3% increments for AGI over $400,000, up to 80% of itemized deductions. If you anticipate a change in administration and earn over $400,000, this could be a good time to accelerate income (say, through a Roth conversion for example) and/or “bunch” itemized deductions while there still is no cap or phaseout. Biden also proposes removing the $10,000 state and local tax (SALT) deduction cap, a positive for those in high-tax states like California (but beware of the resurgence of Alternative Minimum Tax).
A prime example of how to “bunch” itemize deductions would be contributing appreciated property to a Donor Advised Fund, Charitable Remainder Trust, or directly to your favorite 501(c)(3) organization. These vehicles do not pay capital gains tax, plus you benefit from a deduction in the year you give (subject to AGI limitations).
Retirement Plan Deductions- Rather than the dollar value deduction employees currently receive when they contribute pre-tax dollars to an employer sponsored plan, Biden proposes a credit for employee pre-tax contributions at 26%. This flat credit will benefit individuals in the 0-24% tax brackets. However, those in higher tax brackets are not only subject to a capped credit, they are also handcuffed by ordinary income tax on future distributions. Investing in a Roth option, even for those in the highest tax bracket, may be a wise decision if this policy change comes to fruition.
Step-up in Basis- This tax benefit to inheritors is also on the chopping block to be eliminated. This applies to appreciated property in your hands, such as your home, a rental unit, stocks, mutual funds and many other assets. The details have not been revealed, but this could result in a capital gains tax assessed at your death or your heirs will inherit your (low) tax basis. If the latter, they would pay capital gains tax when they dispose of the property.
Joe Biden also aims to expand various tax credits, including those for first-time home buyers, qualifying children, and child & dependent care. On the business front, the only constant when it comes to tax policy seems to be change itself. If you are a business owner, you’ll want to pay close attention to key proposals to reduce QBI benefits, raise corporate tax rates, and impose surtaxes on corporations that manufacture offshore.
If you are interested in diving into a full analysis of the 2020 presidential tax plans for individuals and businesses, I recommend visiting www.taxfoundation.org. Happy reading!
“I believe in fostering a relationship with your personal finances. Once you begin to understand what deeply matters to you, the way you put your dollars to use becomes an expression of those values. When you can orient yourself to view your spending as a reflection of who you are, you’re able to exercise control over how your money moves; there is great power in that.”