Tax Moves if Biden is Inaugurated

The best way to start this off is to get your attention with a quote from Joe Biden’s June speech to campaign donors. He said: “I’m going to get rid of the bulk of Trump’s $2 trillion tax cut, and a lot of you may not lake that, but I’m going to close loopholes like capital gains and stepped-up basis.”

What Biden Says He Wants to Do

Now that your thoughts are racing as to your various business and personal taxes and your retirement accounts, here are some specifics cited by the Biden campaign.

Higher taxes for “high earners”

Biden wants to roll back President Trump’s tax rates for those earning $400,000 or more. This would take the top tax bracket back up from 37% to 39.6%.

No more capital gains tax breaks for “high earners”

If Biden’s proposals get passed, it would mean that filers that report more than $1 million in income could move from paying 23.8% federal tax on their long-term capital gains to paying 43.4%. How? He wants to tax all capital gains and dividends at ordinary income tax rates. High earners would no longer pay 20% in capital gains, instead paying the 39.6% ordinary rate. Some high earners could also be subject to a 3.8% net investment tax.

Eliminate the step-up basis

The step-up basis is an allowance in the tax code for people to pass on to their heirs certain assets at their current value at the time of death, thus not taxing the growth of the assets over the many years they have been accumulating. This is not just about the rich, as many investors, particularly those who have invested in real estate for rental income during retirement, may have never been “high earners,” but they have spent decades growing the value of their assets. This would also apply to buying stocks low and letting them grow many times over in value over the years. The heirs would have to pay capital gains on the growth in value.

Actions You May Take

There are other proposals in the tax and business arenas, but those are some major issues. Do not hyperventilate yet, as there are actions you can take to help in reducing the damage. These are just highlights and simple explanations. It is imperative that you consult with your accountant or tax advisor to get your action on track to lessen future damage to your financial assets. Some ideas to discuss include:

  1. Roll over 401(k) and IRA funds to Roth equivalents. This is not a slam dunk, as it needs to be done efficiently. Consult with your accounting or tax expert, as it depends on your tax bracket now compared to what you think it will be later.
  2. With the same thought in mind, start a new Roth IRA or Roth 401(k). If it looks likely that you will retire in a higher tax bracket, this may be the way to go.
  3. Find other investment vehicles that will be tax-free in the future. One example is a LIRP, or Life Insurance Retirement Plan.

The takeaway here should be that, unless Trump pulls a rabbit out of a hat, you should be making plans for the new administration. Should they take the Senate, it is even more important and urgent.

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