By Novi Wealth Partners
With newly elected President Joseph Biden in the White House and Democratic control of both houses of Congress, various proposals are on the table that could result in significant changes to retirement plans, particularly for individuals and couples who earn more than $400,000 per year. A change in administration can sometimes necessitate reevaluating your retirement and estate plans, as every financial strategy should take the current tax climate into account.
Social Security Reform
The Social Security Administration has projected a Social Security shortfall by the year 2035. (1) President Biden has proposed several key changes intended to address the general issue of long-term Social Security solvency while also making benefits available to certain populations. Biden has proposed to increase Social Security Benefits to 125% of the federal poverty level, increase benefits for Americans who have been receiving payments for 20 years or more, and pay greater benefit amounts to widows and widowers. (2) The President has proposed to fund the expansions, in part, by imposing higher Social Security tax rates on earnings between $400,000 and $600,000. (3)
Estate Tax Law Changes
The Biden plan includes changes to the taxation of intergenerational gifts and estates. The plan could include a repeal of the “step-up in basis” that currently allows heirs to legally avoid paying tax on capital gains prior to the transfer of assets. In addition, the maximum long-term capital gains (LTCG) tax rate could increase from its current 20% to a new cap of 39.6%. The lifetime Generation-Skipping Transfer Tax (GSTT) exclusion, currently set at $11.7 million for 2021, is already scheduled to sunset in 2026, resulting in the imposition of estate taxes on estates exceeding $5.8 million. Additional proposed legislation could further reduce the exemption to $3.5 million, the limit in 2009. (4)
Changes To 401(k) Plans
The Biden administration has reportedly proposed to change the way contributions to a 401(k) plan affect tax liability. The plan would replace the traditional tax deferral with a flat 26% tax credit. The change would have the effect of equalizing tax deductions between income brackets. Since lower earners are taxed at lower rates, tax deferrals under the current structure results in greater current-year tax savings for high-income earners. The Biden plan would also create “automatic 401(k)” accounts, designed to offer the benefits of a 401(k) plan to individuals who are not offered retirement plans through their jobs. (5)
Reinstating The Pease Limitation
An additional provision of the Tax Cuts and Jobs Act (TCJA) could be rolled back: the repeal of the Pease Limitation, which was first introduced in 1991 and has since been repealed and reintroduced twice. The Pease limit began to incrementally reduce the tax deduction value by 3% on certain itemized deductions for taxpayers whose adjusted gross income (AGI) exceeded specific thresholds (which changed each year). In 2017, the last year before the recent repeal, the AGI limit was $261,500 for single filers. If the Pease limit were reinstated, high earners would lose the tax saving benefit of commonly itemized deductions.
What do these and other proposed changes mean to you, to your family, and to your retirement plan? Bottom line: if you have not recently reviewed your financial plan, now is the time to reassess and make sure your strategy is aligned with the potential tax law changes that we may be seeing over the next several years. Call us at (609) 921-7002 or email info@noviwealth.com and schedule a time to meet with us and discuss the big picture.
About Novi Wealth Partners
Novi Wealth Partners is an independent, fee-only comprehensive financial planning firm dedicated to empowering clients to discover their definition of true wealth while providing the confidence to achieve it. With 20+ years of experience, we have found that most people don’t care about money, but instead, they care about what money can do for them and their loved ones. As a result, we focus on guiding our clients to find their unique vision for their life and developing a plan to help them live out their values. Our goal is to truly understand our clients on a personal level and help them navigate life’s many changes.
We are located in Princeton, New Jersey and we service clients both locally and nationally. There are four CERTIFIED FINANCIAL PLANNER® practitioners in the firm, all of whom are members of the prestigious National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA). We prioritize a team-based approach, which allows us to deliver comprehensive financial planning, investment management, tax planning advice, retirement planning, estate planning advice, risk management advice, and concierge level wealth management. We are committed to providing each of our clients a level of service as unique as they are and we are proud, as Fee-Only™ financial advisors, to offer unbiased financial expertise. To learn more about Novi Wealth Partners or to get started on your financial journey, visit our website or connect with us on LinkedIn.
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