With one of the most contentious elections in history behind us and the democrats' taking control of Congress, President-elect Joseph R. Biden, Jr. is set to take office on January 20th. In anticipation of a new administration, high income earners are left wondering - how will the Biden presidency affect me financially? Until Biden takes office and begins enacting changes, we won’t know for sure what to expect. But based on his official campaign platform, past interviews and projections, we can better prepare ourselves for the potential changes to come.
Challenge #1: Expect Higher Taxes
Much of Biden’s tax plan focuses on raising taxes for high earners, corporations and capital gains. In fact, it’s estimated that approximately 80 percent of tax increases would affect the top one percent of income earners.1
For those earning over $400,000 annually2, Biden is projected to raise taxes including ordinary income and short term capital gains back to 39.6% and limit itemized deductions to 28%. Additionally, Biden has proposed reenacting the social security tax on wages and net self employment income above this $400,000 income threshold. High income earners above one million would also face higher capital gains taxes similar to ordinary income rates with an 3.8% NIIT add on (43.4%). Households with an adjusted gross income of $400,000 a year or less will likely see less dramatic tax changes.
Challenge #2: Corporate Taxes May Be Raised
Under Biden’s proposed tax plan, corporate tax rates are expected to rise to 28 percent, up from the current 21 percent. Additionally, he may set a minimum tax of 15 percent on shareholders’ profits and increase the taxes on foreign earnings of companies overseas.3
Challenge #3: Real Estate Loopholes Could be Eliminated
Rumors are that Biden may eliminate both the Section 1031 like-kind exchange and faster depreciation write-offs. Real estate investors would lose the ability to utilize these common tax deferment and reduction techniques.
Like kind exchanges have taken place in the real estate industry for years and have been a part of the IRS code since 1921.4 Under current law, real estate investors can delay capital gains taxes when they sell properties and direct earnings into new investments - assuming they follow the IRS’s regulations as to what defines eligibility for Section 1031 exchanges.
Challenge #4: Elimination of Fossil Fuel Subsidies
For oil industry executives, the elimination of fossil fuel subsidies could affect your earnings. As of September 2020, this industry is said to be worth $14 trillion in assets.5
Biden is pushing to end U.S. fossil fuel subsidies worth billions of dollars a year in an effort to combat climate change and reach net-zero emissions within 30 years.6
Challenge #5: Reverses to the Tax Cuts and Jobs Act of 2017
The Tax Cut and Jobs Act of 2017 included several advantageous tax changes for high earners and business owners - including dropping corporate taxes from 35 percent to 21 percent.7 Biden is predicted to eliminate some aspects of the TCJA, likely reversing certain tax breaks for corporations and high-earners. Additionally, Biden would eliminate the $10,000 cap on itemized deductions for state and local taxes.
Challenge #6: Raising of Estate and Gift Taxes
Biden has been cited as saying he’d likely restore estate and gift taxes to pre-TCJA levels.2 Any eligible assets gifted above that amount would be likely taxed at a rate of 40 percent - unless the Biden administration changes it otherwise.8 Biden has also proposed the elimination of the step up basis for inherited assets.
We could begin seeing changes soon after Biden takes office. If you’re unsure whether or not your financial situation could be affected, it’s important to reach out to your trusted financial professional. Together, you can create a plan and prepare for what may be coming down the line for you and your future taxes.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.