Biden Tax Proposal


There has been a lot of chatter regarding Biden's proposed tax increases as he will address Congress on Wednesday. The speech could be accompanied by the release of Mr. Biden’s American Families Plan which is the second part of his infrastructure proposal and is likely to be accompanied by a new set of tax increases including taxes on capital gains, individual income, and estates.

What could be proposed?

-Capital gains taxes – Bloomberg has reported that Biden will propose treating capital gains as ordinary income for people earning over $1 million. There have been differing reports regarding what “earning over $1 million” means. This could be anywhere from annual income over $1 mill, a capital gain over $1 mill, or even a single filer with income more than $500k. The jury is still out...

-Individual taxes – We expect the next phase of the Biden tax plan will include raising taxes to 39.6% from 37% on taxpayers earning over $400,000.

-Estate taxes – We expect that the administration will propose raising the estate tax rate to 40%, lowering the exemption to $5.5 million from $11.5 million, and ending stepped up in basis at death.

-Real estate taxes – The Biden campaign proposed closing unspecified tax loopholes for real estate. We think this refers to Section 1031 like-kind exchanges.

-Corporate taxes – An outline of the Biden corporate tax plan was already released as part of the American Jobs Plan, which would raise the corporate tax rate from 21% to 28%.

When will the new rates be effective?

-Capital gains taxes – There is potential for the capital gains tax hike to be effective retroactively to avoid possible sell-off in the equity markets where investors would look to cash in on large gains at the current capital gains rate. This will have a major impact on M&A. 

-Personal and corporate tax increases will likely be effective for tax year 2022.

How might equity markets react?

-If capital gains tax hike is not retroactive, it is likely that there will be a short-term correction, which could be substantial, prior to this date. This is why we believe the capital gains tax hike will be retroactive.

-Currently, people earning more than $200,000 pay a capital gains rate of about 23.8% including the 3.8% net investment tax which helps fund the Affordable Care Act, known as Obamacare.

-Retirement accounts would be shielded from the capital gains tax hike as these vehicles are taxed as income when funds are withdrawn.

-Under the new plan, wealthy Americans could face an overall federal capital gains tax rate of 43.4% including the Obamacare tax. For some Americans living in New York and California, their total capital gains tax rate could exceed 50% when state taxes are included, according to the Tax Foundation.

-Investors can possibly defer and possibly reduce the tax they pay on capital gains if they reinvest these gains into opportunity zone funds created by former President Donald Trump's 2017 tax law to promote investment in low-income communities. However, opportunity zones could also be overhauled under Biden's tax plan, according to media reports as the Biden administration looks to unwind many of the tax cuts passed by the Trump administration.

-Congress could step in and expand the tax on corporate foreign profits. The administration proposed doubling the tax rate on Global Intangible Low Tax Income which affects taxes on foreign profits derived from assets such as intellectual property, but some Democrats want to go further and increase taxes on foreign income derived from tangible assets. We think this is probably unlikely, but it is a risk that has not been factored in by the markets.

What should I be doing now?

Max out tax-deferred retirement accounts.

Consider a Roth-IRA conversion. With a Roth-IRA, you pay taxes on the principal and all gains are tax free in the future.

We would not advise trying to time a potential tax increase related sell-off for a few reasons:

  • If the tax changes apply retroactively to the start of 2021, it may already be too late to lock in the current lower tax rate on some gains. Therefore, there would unlikely be a capital gains tax hike related sell-off.
  • Ultimately, the personal and corporate tax hikes are relatively minimal and likely won’t have much impact on the trajectory of the overall market.

We will continue to monitor the situation and update you as more information is available.  Please reach out if you would like to discuss.

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