Any presidential election that transfers the White House to a different political party usually affects the way Americans are taxed, but President-Elect Joe Biden has pledged little change for those whose income is below $400,000 a year. A look what he stated during his campaign on tax policy shows he does have some changes in mind for wealthy taxpayers and big corporations, however.
Even though new tax brackets won’t actually affect us this year, the end of 2020 is the perfect time to start thinking about tax strategy shifts from Biden’s possible new approach. For advisors, getting financial planning clients ready for what’s on the horizon should be a priority now.
Bill Vasil, a tax partner at Ary Roepcke Mulchaey CPAs and tax advisor to FP Alpha, an AI-driven comprehensive wealth management solution that helps advisors identify actionable recommendations to their clients, emphasized that taxpayers earning less than $400,000 a year might even pay less tax after Biden is in office. This could happen if they can take advantage of his pledged boosts to child-tax credits and dependent-care benefits, or if they are eligible for a more generous first-time homebuyer credit.
Planning Ahead Important for Higher Earners
For earners above the Biden “magic number” of $400,000 in annual income, now is the time for advisors to begin thinking about ways to manage changes to their future tax obligation.
Vasil highlighted the expected rise in the top marginal tax rate, from 37% to 39.6%, if Biden’s plans are supported by Congress, and a second layer of Social Security tax coming for those with annual income above $400,000. In addition, the reduction or loss of the qualified business income (QBI) deduction is likely to hit taxpayers in this income range.
For people reporting over $1 million in annual income, it will be critical for advisors to prepare for the new 39.6% tax bracket, especially as it affects long-term capital gains and qualified dividends, Vasil said. “That can be a big difference for a very high-net-worth individual,” he said of Biden’s tax increase plans at the higher end of earnings.
Vasil also noted that Biden has called for a second Social Security payroll-contribution-base threshold above the wage level where that tax is suspended at $142,800 in income in 2021. This move would add to the Social Security payroll tax burden of people earning over $400,000 a year.
When to Expect Changes
So when exactly will these changes take effect? It’s a little hard to say, but Vasil predicted the outcome of the two runoff Georgia U.S. Senate races in early January will be a determining factor. Biden’s tax reforms need solid backing from Democrats in Congress to be approved.
“I think it's important to look at these Senate races to see if the Democrats can at least get to that 50/50 split [in the Senate]; if that's the case, probably sometime in 2021 you'll have a law passed which would most likely go into effect in 2022,” the tax partner said. Vasil expects the pace of tax overhaul under Biden to resemble that of President Trump’s Tax Cuts and Jobs Act (TCJA) enacted less than a year after his inauguration in early 2017.
Vasil said if just one or neither of the Georgia Democratic candidates wins, it could be a lot tougher for President Biden to get his proposed tax restructuring passed. “But what we've learned in 2020 is to expect the unexpected, so it’s just a situation we’re going to have to closely monitor,” Vasil said.