With narrow majorities in both the House and the Senate, the Democratic Party under President Biden faces a difficult path for getting its policy priorities passed. But that hasn’t stopped the administration from proposing a fairly ambitious agenda of tax changes and credits.
While we don’t know the likelihood of these proposals passing or what the time frame might be, it’s still worth thinking about how they might impact your financial plans. Here are some proposals you might want to consider:
Income Tax Changes
Biden has proposed raising the current top income tax rate from 37% to 39.6%. One White House suggestion has this new rate applying to individuals earning more than $452,700 and married couples making more than $509,300. Under current brackets, singles earning $523,601 and up or couples making $628,301 or more pay the top 37% marginal rate.
Capital Gains Rate Tax
Biden has proposed increasing the capital gains tax rate to 39.6% from 20%, which would apply to both singles and joint filers who make $1 million or more. In that highest bracket, both long-term and short-term capital gains would be taxed as ordinary income.
This will have the greatest tax impact on people inheriting securities or real estate that has been held for long periods of time. Family-owned businesses and farms will not be subject to tax if they’re left to heirs who continue to run the business, and property donated to charity will not be subject to this tax.
Child Tax Credit
Currently, taxpayers are eligible for a partially refundable credit of $2,000 per child for children under the age of 17. For 2021 only, that figure has been raised to $3,000 per child, with 17-year-olds now eligible to be included. For children under the age of 6, the credit is $3,600 and fully refundable. Biden’s American Families Plan proposes to extend these changes through 2025.
Expansion of Child and Dependent Care Credit
The situation is similar for this credit, which has been changed for 2021, and the Biden administration has proposed to make these changes permanent. Before 2021, taxpayers were eligible for a 20%-35% nonrefundable tax credit on up to $3,000 (or $6,000 for two or more dependents) in maximum qualifying expenses. That has been raised to a fully refundable 0%-50% tax credit on up to $8,000 ($16,000 for two or more dependents) in maximum qualifying expenses.
A 1031 exchange currently allows real estate investors to roll the proceeds of a sale into a future purchase without paying capital gains tax. If the assets were passed to heirs, they could also avoid capital gains tax. The Biden administration would eliminate the tax deferral on property investment gains in excess of $500,000.
Estate Tax Changes
Exemptions and Rates
The Biden administration has proposed reducing the estate tax exemption to $3.5 million per individual and $7 million per married couple, from its current $11.7 million. The tax rate, currently at 40 percent, would be increased according to a graduated scale:
- 45% on the first $6.5 million
- 50% on the next $40 million
- 55% on the next $50 million
- 60% on everything above that
This graduated tax rate would be a change from recent years, so it might benefit very high-net-worth individuals to begin making estate plans for amounts well above the exemption level.
The current lifetime gift tax exemption of $11.7 million would be reduced to $1 million. Any unused gift tax exemption over $1 million would be lost after the new rule becomes effective. So if you’ve gifted $3 million to your heirs before the reduction takes effect, you can deduct the entire total from your estate. But if you wait until after the effective date, you would have to pay gift tax once your lifetime gifts exceed $1 million.
Step Up in Basis
At present, property receives a basis equal to its current value at the time it is inherited, rather than taxed on how much its value has increased since it was originally acquired. Biden has proposed eliminating this “step up” in basis — taxing inherited property at the time of the decedent’s passing for any unrealized gains of more than $1 million ($2 million for married couples).This will have the greatest tax impact on people inheriting securities or real estate that has been held for long periods of time. Family-owned businesses and farms will not be subject to tax if they’re left to heirs who continue to run the business, and property donated to charity will not be subject to this tax.
Remember, each of these remains just a proposal, and there’s no way to tell if – or when – they might be passed. But if any of them might have an impact on your financial plans, talk to your Baird Financial Advisor team about what you can do to be prepared.
Baird does not provide tax or legal advice. Please consult your legal or tax professional for specific information. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your our team before taking action.