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Biden Tax Plan Analysis for Individuals: What You Should Know and Actions to Consider Prior to Year End

Although we often see large discrepancies between tax plans on the campaign trail and what ends up as law, here is a basic overview of what has been proposed in the Biden tax plan and financial planning strategies to consider before the end of this year.

Increase in income tax rates for highest income earners from 37% to 39.6%

The threshold for this bracket is currently annual income for individuals of over $518,400; the proposed changes would lower this threshold to incomes over $400,000.

What to do in 2020

If you anticipate more than $400,000 of income next year, realize more taxable income in 2020 (if possible), as opposed to deferring into following years.

Elimination of step-up in cost basis for inherited assets

Currently, inherited non-IRA assets are eligible to receive a step-up in basis, which typically means one would not pay taxes when receiving the inherited assets.

The revision to the tax code suggests that all inherited assets would be subject to capital gains taxes, which would have significant estate planning consequences.

What to do in 2020 (and beyond)

Apply a structured gifting plan during your lifetime.

Elimination of long-term capital gains treatment for individuals with $1,000,000+ annual income

Currently, all taxpayers are eligible for long-term capital gains treatment for non-IRA assets that have been held for over 12 months, regardless of income level.

With this change, all capital gains would be subject to the ordinary income tax rates (39.6%) if annual income levels surpass $1,000,000, regardless of holding periods.

What to do in 2020

If you anticipate more than $1,000,000 of income in 2021 or the years following, consider selling investments to capture long-term capital gains treatment in 2020 prior to the proposed 2021 tax code changes.

Additional social security tax applied to individuals earning over $400,000

Currently, the 12.4% social security tax is evenly split between employer and employees (each party pays 6.2%, up to the capped wage base of $137,700).

Under the proposed tax code, additional social security tax would apply if you earn more than $400,000 of employment income.

What to do in 2020 (if possible)

Realize more employment income in 2020 (rather than deferring into 2021).

Limiting tax deductions for qualified retirement savings, like 401(k) plans

Currently, all qualified contributions to traditional 401(k)s and other qualified retirement plans are deductible from taxable income.

The proposed plan would replace the dollar-for-dollar deduction with a tax credit equivalent to 26% of the retirement savings contribution.

What to do in 2020

If your tax bracket is likely to be over 26% in 2021 (typically individuals with income over $163,301), you should maximize deductible contributions in 2020.

Given the possibility of the Biden tax code changes on the horizon, individuals should be aware of their options and prepared take strategic tax-planning action before year end.

Author Profile

Ian Castille

The Author: Ian Castille

Ian is a Principal and Senior Financial Advisor at Capital Advantage, as well as a CERTIFIED FINANCIAL PLANNER™ (CFP®) and an Investment Advisor Representative. He is part of the investment committee, and is responsible for developing and maintaining client relationships, designing financial plans, and managing investment portfolios. Ian specializes in helping his clients navigate the financial transition to retirement. His work includes personalized strategies to reduce taxes, make smarter investment decisions, and optimize income streams. As an advisor, Ian believes his job is to bring peace of mind by providing financial clarity for his clients.