President Joe Biden intends to shake up the tax system. Details are still a bit sketchy. The administration has made proposals, but the legislative language is still being written. Still, it’s clear that large-scale change is coming and that investors are facing a very different tax picture than is reflected in their present retirement plans.
It’s time for wealth advisors to understand what changes are most likely to come from the administration and craft ways for clients to navigate a new world.
There are four, key changes proposed that will shake up retirement and estate planning, according to tax expert Joe Elsasser, writing in Think Advisor.
-- a jump in rates: Biden has called for a return in the top rate to 39.6%, up from the 37 percent seen since the 2018 tax cuts. Congress will spend some time fighting over the nuances, but the bottom line according to Elsasser is “advisors need to be aware that taxes are unlikely to decrease for lower-affluent or affluent taxpayers — and plan accordingly.”
-- a change in the estate tax exemption: a proposed drop in the estate tax exemption from $11.7 million to $3.5 million requires serious thought by advisors. As the New York Times said, it may be time to start worrying about the estate tax even if you’re not extremely wealthy.
-- higher taxes to pay for Social Security: the administration is expected to increase Social Security taxes as a way to keep the government pension system afloat. It’s a complicated proposal involving the creation of a “donut hole” in the payroll tax structure, according to the University of Pennsylvania.
-- an end to the “step-up in basis at death”: Biden has proposed eliminating the provision. Ellasser says that” could result in one of two possibilities: carryover basis or immediate taxation of capital gains on death.” Either will require thoughtful planning by advisors.