By Matthew Gaude & Shawn McGuire
Truth be told, there’s never an ideal time for an economic crisis, but experiencing a global pandemic and the ensuing economic struggles right before an election makes things extra interesting for the presidential candidates. In other words, expect to see lots of economic recovery-related content when campaigning starts in earnest. That means you’ll see plenty of tax talk too, because taxes are how the government will pay for any new economic initiatives to kick-start the economy.
We haven’t heard much from the Trump camp about second-term tax policies, but Biden has released some tax policy proposals during and since the Democratic primaries. Let’s look at some of Biden’s tax changes so you can be informed come November.
More Wealth = Higher Taxes
The goal of Biden’s plan to raise taxes on the wealthy is to help close the income gap. As a reminder, in 2017, the Tax Cuts and Jobs Act (TCJA) lowered the highest personal income tax rate to 37%. Biden plans to increase it back up to 39.6% on top of capping itemized deductions for those earning above $400,000. (1) Other plans that affect the wealthy include getting rid of favorable capital gains tax rates for those making more than $1 million and increasing the federal estate tax exemption. (2) He also has ideas about getting rid of the step-up basis for inherited capital assets, essentially putting more taxes on money passed down to heirs. Expect to hear more from Biden about reversing many of the TCJA reforms.
Tax Breaks For Everyone Else
Also in line with Biden’s hope to close the income gap is his idea of reducing taxes for lower and middle-income earners. This may look like increasing the child and dependent care credit, forgiving student loan debt (and excluding the forgiven amount from taxes), rewarding those who are saving for retirement, and helping small businesses offer retirement plans by giving them a tax credit.
More Stimulus Checks
Many Americans received a stimulus check in the spring when COVID-19 first started wreaking havoc on Americans’ wallets. Well, Biden says he supports more stimulus payments and wants to include families with dependents over age 17, which was not the case with the CARES Act.
More Corporate Taxes
Biden wants to tax large corporations more by raising the income rate and imposing a minimum tax. On top of that, he also plans to repeal part of the CARES Act that allows net operating losses to be carried back. Biden also intends to encourage businesses to stay in the U.S. by making companies pay high taxes on foreign profits and return public investments and tax benefits when they move jobs to foreign soil. Biden does want to help existing or recently closed-down facilities by giving a tax credit if these projects benefit local workers and communities. (3)
Biden would like to make improvements to Obamacare by allowing all families who buy insurance from a health insurance exchange to take advantage of the tax credit by basing the cost of a hold-level health plan, rather than a less expensive silver level plan. From the back end, Biden wants to help Americans manage the rising cost of healthcare by imposing a tax penalty on pharmaceutical companies that raise drug costs more than the rate of inflation. He also wants to eliminate any tax incentives for pharmaceutical companies to move production overseas.
Help For The Elderly
Some of Biden’s proposed tax policies include assistance in the form of a tax benefit to seniors who pay for long-term care insurance from their retirement savings and allowing those over 65 to claim the earned income tax credit. Biden also wants to protect Social Security by making wealthier Americans pay more Social Security tax. Currently, wages above $137,000 are not subject to Social Security payroll tax and Biden would like to make wages over $400,000 subject to the tax. (4) Finally, his plans include providing a $5,000 tax credit for family members or other informal caregivers.
More Benefits For The Disabled
Biden would also like to increase tax credits for employers who hire staff with disabilities and/or improve the accessibility of their workplace. He wants to make ABLE accounts available to more adults with disabilities to help them pay for disability-related expenses.
Support For The Environment
On the climate change front, Biden wants to restore the full electric vehicle tax credit and provide more tax breaks for people who make their homes or businesses more energy-efficient. A carbon tax isn’t out of the picture either.
A Move For More Affordable Housing
To encourage first-time homebuyers, Biden wants to provide a refundable tax credit of up to $15,000, paid out when the home is purchased instead of when they file their taxes. (5) To give low-income individuals a hand, Biden plans to introduce a renters tax credit that will reduce rent and utility costs to 30% of a low-earner’s income.
Capital Gains Increase
Capital gains are subject to a tax rate ranging from 0% to 20% depending on the taxpayer’s income. Capital gains, under the Biden plan, would be taxed at ordinary income rates for taxpayers with income over $1 million, thereby eliminating the rate preference for these taxpayers. Such income would also be subject to the 3.8% net investment income tax as it was enacted as part of the Affordable Care Act. (6)
Estate and Gift Taxes
Under present law, heirs receive an increased basis or so-called “stepped-up basis” in inherited assets equal to the current fair market value (FMV). As a result, capital gains tax is based on the value of the asset at the time it’s inherited. Biden’s plan eliminates the step-up in basis for inherited assets. It’s not entirely clear whether the proposal would provide the heirs with a carryover basis or impose capital gains tax on the decedent for unrealized appreciation at the time of death, which was one of President Obama’s budget proposals. If heirs receive carryover basis, capital gains tax would be imposed on the heir based on the value of the asset from the time the original investment was made. The could lead to a significantly higher income tax liability for the heir should the inherited asset be sold. If the proposal is to tax unrealized gains of the decedent, the decedent’s estate would pay the tax, and presumably the heirs would take the assets at a FMV basis.
Financial Transactions Tax
Biden supports a financial transaction tax on trades of stocks, bonds and other financial instruments. However, unlike other Democratic candidates from the Democratic primaries, Biden hasn’t released the details of this plan.
To summarize the key tax changes being proposed:
Lots More To Come
We are just on the brink of heavy-duty campaigning, so there will most likely be more details and plans to come from both parties as we get closer to the election. If we can help you figure out how potential tax changes will impact your financial situation or answer any other questions, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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