Your Finances, A New Administration, Now What?

2021 and Beyond:  New Administration, New Taxes?

With a new president and administration and change in House and Senate, now may be a great time to meet with us to discuss how these changes may affect your finances, taxes, and retirement. Given the balance of the U.S. federal deficit and the federal and state spending during COVID-19, increases in taxes is likely ahead. The Investment Service Center team recently hosted a webinar to cover this topic.  Check out a recording of the webinar below or read our summary to help you understand how some of the  administrations proposals may impact investors:

 Proposed income and payroll taxes:

  • Increase the top rate for individuals on ordinary income from 37% to 39.6% for incomes over $400,000. The administration has not made it known whether the $400,000 income threshold would apply to single filers, joint filers or both. Investors may want to consider strategies for lowering their taxable income by contributing more to tax-sheltered retirement accounts.

  • A proposal to tax both long-term capital gains (LTCGs) and qualified dividends at ordinary income tax rates if a taxpayer’s income exceeds $1 million. The 3.8% net investment income surtax would still apply, so the top federal rate on income above $1 million would almost double to 43.4% for affected taxpayers.

  • Currently, the Social Security tax (FICA) is capped on earnings above $142,800. The proposed tax plan is to impose a 12.4% tax on Social Security wages and self-employment income on amounts exceeding $400,000 and create a “donut hole” with no Social Security tax payable on wages or self-employed income between $142,800 (for 2021) and $400,000.

  • The administration has also indicated an interest in repealing the Tax Cuts and Jobs Act of 2017 (TCJA) and this could result in higher individual income tax rates and reduced AMT thresholds. Additionally, this could impact business income and certain investment dividend income.

Wealth transfer:

Repealing the TCJA would reduce the per-person estate transfer tax- exemption from $11.7 million to $5 million or so, dependent on the final repeal version the Biden Administration proposes. Of course, all wealth transfer tax repeals are dependent on lawmakers’ approval. Still, clients with estates may want to consider revisiting their estate plan sooner versus later. 

Capping itemized deductions:

Biden has hinted at capping the benefit of itemized deductions at 28% and restoring the Pease limitations. This cap includes placing a 28% ceiling on itemized deductions including charitable contributions, mortgage interest expense and State and local taxes currently capped at $10,000.

Healthcare:
Biden is a strong advocate of the Affordable Care Act, enacted by President Obama in 2010. He will strive to develop a public health insurance option and make it available to everyone. The public health insurance option's goals would be to make healthcare more affordable than current private choices. Also, putting an end to the coronavirus pandemic is high on Biden's priority list. Public health insurance and the ending of the virus will come with a price that tax collection will satisfy.

Unemployment The Biden Administration has promised “higher wages, stronger benefits, and fair and safe workplaces.” Right away, the new administration plans to create new jobs by hiring individuals in fields that can help fight the pandemic. Investments in clean energy, education, and infrastructure will also bring various new jobs to America under the Biden plan. When it comes to unemployment insurance for the pandemic, the President hopes to extend it and implement “work sharing” to help employers avoid layoffs. 

So what should you do?  The answer may be nothing.  Basing investment decisions on changing headlines has a rich history of backfiring.  We want to work with you to develop a solid financial plan immune to headlines and policy changes and maintain you portfolio based on that plan. Our team would love to meet with you.