President Joe Biden campaigned for president on promises to spend big on infrastructure and social programs, with the plans to be paid for by new tax revenues on corporations and wealthy households.
What the Green Book says about Biden’s new tax plan.
The U.S. Treasury Department’s Green Book, released May 28, lays out an agenda that includes raising the top individual income tax rate and the rate paid on capital gains. Biden has insisted that his higher taxes on individuals will target only Americans earning more than $400,000 per year.
Bear in mind that the Green Book proposals are just that. We’re a long way from new tax laws—the contours of such tax reform legislation are still being debated in Washington, and the most optimistic projections call for the passage of legislation by late summer.
It’s likely that many of Biden’s proposals will be reworked or will fail to be enacted into law. However, for high-net-worth individuals, preparing for any changes in your tax payments is critical to ensuring a healthy portfolio.
As we said, we cannot predict the future, and Biden’s new tax plan may look starkly different if it becomes law. Still, here’s what we know right now:
Income Taxes
Biden wants to raise taxes for the top income-tax rate to 39.6% from the current 37% – while also lowering the income thresholds for paying that higher rate. Here’s how the income thresholds break down by taxpayer:
- Married filing jointly: $509,300 (currently $628,300)
- Single: $452,700 (currently $523,601)
- Head of household: $481,000 (currently $523,600)
- Married filing separately: $254,650 (currently $314,150)
As the numbers above indicate, some thresholds will decrease by approximately $100,000 or more. This means that more people will be expected to pay at a higher rate than before.
The Green Book assumes the tax increases will become effective at the beginning of 2022. But there has been at least some talk on Capitol Hill about making the hikes retroactive to April 28, 2021.
Capital Gains
One of the themes in Biden’s tax proposals is a desire to treat income from both short and long-term capital gains as the same as taxable income from labor. For example, the administration’s plans call for taxing capital gains as ordinary income for taxpayers with incomes over $1 million. That income would no longer be subjected to the lower, 20% capital gains rate on assets held for more than a year.
If enacted into law, this will require a re-evaluation of your portfolio. A wealth management advisor can work with you to optimize your assets to compensate as much as possible for this drastic increase in capital gains rates.
Inheritance
Until now, when heirs received assets like stocks, bonds, and real estate, any gains in value those assets had accrued before being transferred were overlooked for tax purposes. The Biden White House wants to eliminate that accounting fiction, known as cost-basis step-up, and levy capital gains taxes on households with incomes over $1 million.
The capital gains tax would be imposed in addition to the estate tax, which currently kicks in on wealth above $11.7 million for individuals and $23.4 million for married couples. Transfers to a spouse or a charity are excluded from the capital gains tax.
The Biden administration has also said that capital gains taxes would not apply to family farms or to businesses that are left to family members, so long as those heirs continue to operate the family businesses. It remains to be seen whether these exceptions can be effectively carved out, given the complexities of tax legislation.
Republicans in Congress are balking at any tax increases, including Biden’s proposed hike in corporate taxes from the current 21% rate to between 25% and 28%.
Lawmakers on the far-left side of the political aisle, meanwhile, want to go further than Biden. Bernie Sanders, the Vermont senator who chairs the Senate budget committee, has proposed a progressive estate tax, starting at 45% on estates valued between $3.5 million and $10 million, and topping out at 65% for those valued above $1 billion. This could result in significant tax-related losses for many individuals who are relying on future income from inheritances.
For many individuals, inheriting a family member’s estate can result in a life-changing financial situation. If your inheritance can be impacted by a significant change in tax rates, it is best to work with a wealth management advisor to ensure that you are personally receiving as much of that inheritance as legally possible.
Prepare your portfolio for Biden’s new tax plan.
Our view is that tax legislation is likely to pass, but will look at least somewhat different from the proposals spelled out in the Green Book. In the meantime, we’ll continue to keep a close eye on tax developments in Washington, as well as how those changes might impact our clients’ tax-planning needs.
With any sort of changes in tax legislation on the horizon, preparing your portfolio is essential. To learn more about how you can be ready for any changes to your own tax rates, contact us any time to speak with one of our financial advisors.
