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Although we are weeks away from the presidential election and many months from any potential legislation, it is important to examine what tax changes might be on the horizon if Joe Biden is elected. As with any tax legislation, there will be numerous changes between proposal and the final law. This summary is a broad overview of the most significant changes that impact the country’s highest earners along with planning opportunities that may result.

The Biden proposals are relatively tax neutral for the majority of households. The most substantial impacts will be on those with incomes over $400,000 per year. There are also several new and/or restored credits and deductions which are primarily aimed at assisting lower income families and incentivizing renewable energy. It is also important to note that the 2017 Tax Cuts and Jobs Act (TCJA) is scheduled to “sunset” at the end of 2025, which is effectively a net increase in taxes that is already baked in.

Top Tax Bracket

Biden’s proposal calls for the existing brackets to remain in place, except for the highest bracket which would increase from the current rate of 37% to 39.6%. The top bracket currently begins at taxable income levels of $518,401 for single and $622,051 for married filing joint. This increase was already set to take place in 2026, so this is effectively an acceleration of the TCJA Sunset for the highest tax bracket.

Potential Planning Strategy: Accelerate top-bracket income recognition at 37% or defer top-bracket income into years with lower projected brackets.

Top Capital Gains Bracket

The proposal would create a new top bracket for capital gains over $1,000,000 which would be taxed at the maximum 39.6% rate vs. current maximum capital gains rate of 23.8%.

Potential Planning Strategy: Accelerate substantial business or asset sales before new capital gains rates are enacted.

Itemized Deduction Limitations

The proposal would cap the value of deductions at 28% vs. the full 39.6% deduction value. The proposal would also bring back the Pease limitation, which reduces the amount of deductions that can be claimed for those in the highest brackets.

Potential Planning Strategy: Accelerate deductions that may otherwise be limited in the future.

Business & Passthrough Entity Owners

The proposal would eliminate the Section 199A deduction, which was created by the TCJA, for those earning more than $400,000. High-earning owners of certain businesses and passthrough entities would no longer receive the deduction 20% of Qualified Business Income.

Potential Planning Strategy: Review business entity structure and income flows to minimize combined corporate and individual income taxes.

Payroll Taxes

The proposal would impose the 12.4% Social Security tax on wages and self-employment income over $400,000. Currently only the first $137,700 of earned income is subject Social Security payroll taxes and is split evenly between employer and employee.

Potential Planning Strategy: Accelerate earned income over the $400,000 threshold and review business entity structure to minimize payroll taxes.

Estate Taxes

The proposal would decrease the estate tax exemption from the current level of $11,580,000 to $3,500,000 with a top marginal rate of 70%. Under the TCJA, the exemptions were scheduled to revert to an approximately $6,000,000 exemption and maintain the top marginal rate of 40% in 2026. The proposal would also eliminate the cost basis step-up at death.

Potential Planning Strategy: Utilize advanced wealth transfer strategies to lock in the value of the current estate tax exemption.

Conclusion

Substantial tax changes are expected if Biden is elected. For high earners, it will be critical to reevaluate your long-term tax and wealth transfer strategy in the time period between the election and the implementation of any tax legislation.

Sources: https://taxfoundation.org/, https://joebiden.com/two-tax-policies/

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