potential tax impacts
Last updated January 11, 2021
The Democratic Party took control of Congress and the White House for the first time in a decade as Electoral College votes were officially counted while two runoff elections for Georgia’s Senate seats were also completed.
In any Presidential election year, we consider ahead of time how a change in leadership may impact the financial aspects of our clients’ lives.
While this election will impact so much more than just finances, as your Family CFO, the focus of this point-of-view from our tax experts is solely on finances.
Trump’s administration brought a period of relatively low taxation and oversight, while Biden’s administration will likely push for an increase in both, as outlined below.
Regardless of the final outcome, our internal experts project only some incremental changes at most – not a major tax overhaul.
Given this uncertainty, our general guidance is to avoid making major financial decisions based only on speculation of what will happen in the future. There is not currently any added urgency to make changes to your financial plans in light of the election results.
With all that in mind, here is a high-level outline of possible tax policy changes proposed by Joe Biden before the election.
Deduction limits Lifted
Elimination of the $10,000 limit on the deduction for state and local taxes would be especially relevant to those living in states with higher income and property tax rates.
Higher income TAX RATES
- For those earning more than $400,000 per year, the top marginal tax rate could be restored to 39.6%. The rate is currently 37%.
- The value of itemized deductions could be capped at a 28% tax rate.
- The 3% Pease limitation on itemized deductions could also be restored. It is currently set to return in 2026.
- The practice of swapping one business or investment property for another to defer capital gains taxes (“1031 Exchanges”) would be eliminated.
- A 12.4% Social Security payroll tax, split evenly by the employee and employer, may be imposed on wages above $400,000 a year.
Capital gains taxed at ordinary income rates
This change could nearly double the current capital gains tax rates but only for those earning more than $1M per year. Capital gains are currently taxed at a 20% rate for taxpayers with income in excess of $441,450 for single filers ($496,600 for married filing joint), indexed for inflation; the starting point for the 20% bracket will match the starting point for the top ordinary income tax bracket in 2026.
Limiting tax-free lifetime gifts
Decoupled gift and estate tax exemptions, limiting lifetime gifts to $1M per donor.
Increased taxes on gifts
Adjustments to capital gains at death
Biden’s administration is expected to adjust the treatment of capital gains at death: either completely eliminating the tax provision of basis step-up or taxing the unrealized gains at death. Heirs of investments could be taxed based on the original cost instead of the stepped-up basis. Some gifts of appreciated assets that might otherwise be deferred should be considered more immediately to take advantage of the current provision.
Restrictions on family financial gifts
A Grantor Retained Annuity Trust (GRAT) is an estate planning tool that minimizes taxes on large financial gifts to family members. A GRAT is a type of irrevocable gifting trust and is established for a certain term or period of time. The individual establishing the trust reports a gift when the trust is established. Assets are placed under the trust and then an annuity is paid out every year. When the trust expires the beneficiary receives the assets tax-free.
If the individual who establishes the trust dies before the trust expires, the assets become part of the taxable estate of the individual, and the beneficiary receives nothing. Rolling GRATs minimize the risk of mortality during the term, which increases the success of transferring wealth. A 10-year minimum term would eliminate this option.
Loss of Grantor Trust rules
Cap on annual gift exclusions
THE HOUSE AND SENATE RACES
In general, the market doesn’t like uncertainty or sudden change. The market has historically preferred the House and the Senate have different majority parties in power.
Because control over the White House and Senate switched from the Republicans to the Democrats, we could see increased volatility in the financial markets as they react to the potential for significant tax policy changes.
The Electoral College confirmed Joe Biden as the President elect by ratifying his victory in the November election with 306 electoral votes to Donald Trump’s 232.
The Democratic Party won the final two runoff elections for the Senate seats in Georgia, forcing an overall 50-50 split between the Republicans and Democrats. Vice President-elect Kamala Harris will break tied votes, giving Democrats the advantage.
The Democratic Party also won control of the House of Representatives with 222 seats compared to 211 for the Republican Party.
KEEP IN MIND: Even though Democrats won control of both the Senate and House, our internal experts believe a major tax overhaul in 2021 seems unlikely given that some Democratic senators face competitive races for their seats in 2022.
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© 2020 Moneta Group Investment Advisors, LLC. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change. These materials were prepared for informational purposes only; nothing contained herein is intended to represent advice, nor a recommendation of any one party. Assumptions as to what may change given how the election is decided are based on materials that have been deemed reliable but which have not been independently verified. Examples contained herein are for illustrative purposes only based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. These materials do not take into consideration your personal circumstances, financial or otherwise.