Here at FPS, we spend a fair amount of time reading about any potential changes that could impact our client's financial situation or tax burden.
We have always tried to suggest or implement strategies to help make our client's personal goals more achievable.
Generally speaking, we don't get too caught up in worrying about some agenda a politician might talk about during a campaign but rather wait a bit to see how things are likely to play out.
Last month, President Biden introduced the American Families Plan (AFP) which is intended to be an investment in the economic future of our country and to help provide more help to families.
A couple of benefits would be to provide up to four years of preschool and up to two years of free community college to all Americans. Lots more in this plan and you can read more by going HERE
With all this will come higher tax rates for some and the elimination of certain tax breaks we have come to know.
According to the Penn Wharton Budget Model, it is estimated these benefits could cost in the trillions.
Okay, so how are we going to pay for this?
Lyman and I use some pretty sophisticated software to run retirement, college, and other financial goal projections for our clients but we don't need that to know that when one (us or the government) is spending more than we are taking in, we need to raise revenue.
We, as people do this by increasing our income by either getting a higher paying job (or taking on another job or starting a business).
The government does it by raising taxes.
So, the question is, if things go as planned, how does this look for you?
(Bear in mind, nothing is cut in stone and many back and forth will be happening in Congress before the dust settles on this).
As Joe Biden would say, "Here's the deal." (the short list)
- Top individual tax rates would go from 37% to 39.6%
- All income over 400k would be subject to the 3.8% Medicare tax
- Make more than $1 million? Long term capital gains and qualified dividends would be taxed as ordinary income tax rates
- Eliminating the deferral on gains more than 500k on like-kind exchanges
- Taxing unrealized capital gains above $1 million at death
This last one is one of the biggest changes we would see. According to a Wall Street Journal report, this capital gains change at death has been in the tax code for 100 years.
The way this works now is this:
Mary, age 91, passes away with a stock portfolio worth $21 million. She leaves this account to her son and daughter. They happen to sell these stocks a short time after Mary passes and pay ZERO capital gains tax. (Mary's estate would be subject to Estate Taxes but that's a different topic for a different blog article)
Fast forward to 2023 and the laws change. Mary's kids would NOT receive a "step up in basis" and would be subject to a potential tax of up to 39.6% on anything above $1 million.
The bottom line is, if your income is below 400k annually, you shouldn't see too much of an income tax increase and not too much of a tax break unless you are at lower income levels. You would still be subject to this new capital gains tax at death but your income would dictate what tax rate you would be at.
One other tidbit not in the AFP is that taxes on Social Security wouldn't be limited to the first $142,800 (in 2021) of wages. The Biden administration would like to raise that cap so Social Security taxes would apply to more earned income.
Not all is lost, we do have some ideas to help those earning above that 400k limit to potentially avoid higher tax brackets. As far as capital gains at death, we have some ideas there as well.
Have more questions or wondering if you should be making any changes ahead of potential tax law change? Just shoot me an email or give me a call.
Or, if you would like to schedule a complimentary call, click HERE to see my calendar
In good health.
All the best.
Rick Fingerman, CFP®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.