You will most likely have a change to your tax bill under the Biden Administration. But, if you keep your cool and stick to your plan, the tax bite should be manageable
Key Takeaways
For successful people like you, tax rates will most likely increase under the Biden Administration.
It’s important to keep current on the changing tax landscape. But worrying endlessly about tax changes that may never pass is counterproductive.
History shows final legislation is rarely as onerous as initial proposals making headlines.
Planning smartly—after legislation has passed—will allow you and your family to absorb any tax torpedoes fired in your direction.
As Benjamin Franklin famously said: “in this world, nothing is certain except death and taxes.” But I’d like to add this caveat: The only thing certain in this world is that you have a choice between worrying endlessly about taxes--or accepting what comes your way and planning smartly to minimize the taxes when new laws are established. You’ve no doubt seen the alarmist headlines in the national media:
Yes, there is a significant amount of tax legislation being proposed. Some of it will be passed in the current form, but as GovTrack data shows, many of the proposed bills will be amended--or will never even see the light of day. Just as it’s essential to stick to your plan during times of extreme market volatility, the same goes during times of potential tax upheaval. This much we do know about the proposed legislation (emphasis on the word “proposed”):
Biden is proposing a hike to the long-term capital gains rate to 39.6% for households making over $1 million
The top individual federal income tax rate would potentially rise from 37% to the pre-Trump rate of 39.6%.
The corporate rate would rise from 21% to 28%; a 15% minimum tax would apply to corporate book income.
American corporations' foreign income generally would be subject a tax of 21%.
First some historical perspective on President Biden’s proposed tax plan. As New York Times columnist David Leonhardt observed earlier this month, Biden’s tax plan would actually leave rates on the wealthy lower than they were in the 1990s—and significantly lower than they were for most of the last century. Further, many experts believe Biden’s plan to raise taxes for rich investors isn’t hurting stocks.
Remember, alarmist headlines boost ratings and sell papers, whether we’re talking about crime, COVID, market meltdowns or tax policy. They shouldn’t be used to make drastic changes to your financial plan.
We are intentionally not sharing insights about every piece of legislation that is proposed or being considered. We may use it as a barometer, but we do not update planning until tax changes are officially signed into law. Only after a law is enacted do we review it and determine the elements of it that are relevant to our clients. Only after careful analysis and scenario testing do we begin to devise ways to apply tax-saving strategies for our clients. Important tax changes at the state level State-specific tax changes don’t make the same headlines as federal tax changes do, but you need to try to stay current. Here are some important tax changes in key northeastern states that may impact you and your family:
New York is decoupling from the Opportunity Zone program, meaning fewer state-tax deferral opportunities for investors with capital gains.
Connecticut legislators are pushing bills to increase property taxes to 2% for people with homes worth more than $1.5 million, lower the estate tax exemption from its current $7.1 million to $2 million, increase estate taxes and place a surtax on capital gains for people making more than $500,000 per year.
New Jersey has the so-called “Millionaire’s Tax” which imposes a 10.75% tax rate on those earning more than $1 million per year. Could there be more? On the flip side, President Biden said during his campaign that one of his first orders of business would be to eliminate the $10,000 cap on state and local property taxes (SALT) which the Trump Tax Plan imposed primarily on high tax blue states. …so far, no movement on SALT yet.
*** You can find an abbreviated version of most of the state-specific tax laws here.
Some of the items will be universally applicable, but a good portion will apply only to a handful of people. It is important to minimize anxiety about elements of those changes that may never occur—or that may be minimally burdensome if passed. Worrying will not improve your circumstances. Next steps
Please do not make any changes to your existing planning until we have all the information in hand about pending tax changes. I realize the numbers may be scary, but again, there’s a big difference between proposed legislation and actual law. If you or someone close to you is concerned about how new tax policy may impact your financial plan, please contact us any time. We’re happy to help. In the meantime, we will continue to monitor the tax landscape and adjust our clients’ planning accordingly.
Conclusion As Ben Franklin quipped: "Friends and neighbors complain that taxes are indeed very heavy, but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly."
ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth