The Biden administration has rolled out a three-part fiscal agenda, dubbed “Build Back Better.” The agenda emphasizes COVID-19 relief and investments in infrastructure, education, childcare, and paid family leave, among others. The administration proposes paying for most of the latter part of the agenda by raising revenue through higher taxes on individuals, corporations, and estates.
While most of the agenda is far from turning into law, it is worth considering how potential tax changes may impact you.
The following are some of the key tax changes proposed:
Reinstatement of the top marginal tax bracket to 39.6% from 37%, reversing 2017 tax cuts;
Ending capital income tax breaks for households making over $1 million; thus, a 39.6% tax rate on all forms of income (capital gains, dividends, etc.);
Ending the step-up of basis for an individual at passing with assets in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and not donated to charity. However, there may be protections for small businesses and farms;
Eliminating the carried interest loophole for hedge fund and private equity managers;
Ending 1031 real estate exchanges greater than $500,000, which allows real estate investors to defer capital gains when exchanging property;
Extending the 3.8% Medicare tax consistently to those making over $400,000;
Increasing the corporate tax rate from 21% to 28%, which was reduced from 35% in 2017;
Finally, not explicitly mentioned, but important to consider – it has been rumored that the Biden administration will allow the estate tax exemption to sunset in 2026 from $11.7 million per individual to $5 million, adjusted for inflation.
As potential legislation progresses forward, careful tax planning will be important for high-income earners. While the finer details are unknown at this juncture, tax changes could result in some penal “tax cliffs” at high income thresholds. Coordination between your tax preparer and investment advisor will be critically important.
Tax-efficient investment strategies and vehicles will continue to serve investors well over the long-term. We believe that low-cost exchange-traded funds (ETF) will continue to play an important role in tax-efficient investment strategies.
Consider reviewing your current estate plan. We recommend reviewing at least annually to ensure your legacy goals and wishes are aligned with a tax-efficient transition to the next generation.
Lastly, higher tax rates alone are unlikely to upset the financial markets. Stocks have a long history of strong gains through high and low tax regimes. This isn’t to say taxes are irrelevant, but often there are other concurrent or overriding factors that determine the long-term direction of the markets.
If these initial plans progress, final legislation may look different from the initial proposals. We will be monitoring developments as it makes its way through Congress and are available to discuss at any point.
As always, we are happy to discuss your situation and how the potential legislation may impact you. Please feel free to give us a call if you have any questions.
Contact us at 865-584-1850 or info@proffittgoodson.com