As the Biden Harris Administration has begun its first 100 days, noting the President’s tax plan is crucial for higher-income households to understand and likely make adjustments to their financial and legacy planning. That said, middle-class households should pay attention, too. While, generally speaking, the sweeping changes to the tax code will aim to levy higher taxes on corporations and high-income households, the proposed legislation to remove the step-up in basis upon death will have ramifications for many Americans irrespective of their socio-economic status. President Biden’s proposed tax plan’s components include raising the top individual income tax rate from 37 percent to 39.6 percent. The plan also seeks to extend the 12.4 percent shared employer/employee Social Security tax capped at 137,700 to earnings over 400,000 dollars. Under a Biden Administration, the capital gains tax rate will rise to 39.6 percent for taxpayers with income over one million dollars. This rate hike is up from the current long-term capital gains rate of up to 20 percent for wealthy investors.
President Biden is also proposing to overhaul taxes around wealth transfers. He would eliminate the step-up in basis to the date of death valuation of inheritable equity assets. Instead, any unrealized capital gains will become subject to taxation. This will have a huge impact on all Americans; especially those who inherit their parents’ homes or other real estates that their parents owned for a long time and have appreciated greatly over the years. In addition, P, there is a proposal to reduce the amount an individual can transfer free of estate and gift taxes in life and in death. The currently permissible 11.58 million dollars will be reduced down to 3.5 million in bequeaths upon death and a cap of one million dollars in lifetime gifts.
If Democrats cannot regain control over the Senate, many of the aforementioned Biden Harris proposals will likely not be possible. Nevertheless, some portions of President Biden’s tax and economic reform may garner support from GOP lawmakers. Senators like Marco Rubio (R-FL) and Mike Lee (R-UT) have, in the past, been in support of child tax credit expansion. This previous support will bode well for President Biden’s proposal for a temporary increase of the child tax credit to 3000 dollars for children under age 17 and a 600 dollar bonus for children under the age of six. There is also sentiment for raising the corporate tax rate, which President Biden wants to increase from 21 to 28 percent if lawmakers work together to replenish federal coffers. Republicans find it easier to raise corporate tax than taxes on wealthier individuals.
Additionally, a closely divided Congress may find it more expedient to increase IRS funding to pursue larger, more monetarily beneficial targets. These targets might include corporations or high wealth individuals; rather than the draft and pass new tax legislation, it will likely prove to be a contentious process. American taxpayers would also probably prefer this approach to a more dramatic income tax increase. According to the Taxpayer Advocate Service (an IRS agency watchdog), IRS appropriations and employee numbers fell by more than 20 percent between fiscal years 2010 to 2019.
The year 2021 continues to bring new and challenging uncertainties to taxation, retirement, and legacy planning. President Biden’s tax reform plans may significantly impact how families approach wealth building and inheritable asset transfer with minimal tax consequences, particularly if a nearly divided Congress opts to use the power of the IRS as an expedient arm of the federal government for improved tax base revenues. In this case, all Americans must watch what proposals are enacted into law and make their adjustments accordingly to preserve their assets.
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Kevin Snyder is a husband, father, and an Orange County estate planning attorney at Snyder Law, PC in Irvine, California. He’s all about family and passionate about estate planning, elder law, and veterans. He founded Snyder Law to help people be prepared and have the peace of mind they are protecting their families and aging parents for when life happens.