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How President Biden’s Tax Plan Could Affect Retirement Planning Thumbnail

How President Biden’s Tax Plan Could Affect Retirement Planning

As we discussed on our previous episode, many financial pros and taxpayers are working overtime this tax season to accommodate the American Recovery Plan Act’s changes to tax law.

But my team at Keen Wealth also has one eye on Tax Day 2022. President Biden and Congress continue to float some pretty significant tax proposals, including last week’s package focused on corporate tax rates. On today’s show, we dig into items aimed at individuals, particularly some potential changes that could affect retirees this time next year.

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1. Readjusting tax brackets.

Currently the top Federal tax bracket is 37%. President Biden has proposed moving that bracket back to the 2018 rate of 39.6%. That figure could come down a bit in negotiations with Congress, and there might be some momentum to reduce tax rates for people in lower brackets as well.

Since the 2020 campaign, President Biden has defined “high earners” as folks making over $400,000 per year. He’s pledged that anyone earning less than that isn’t going to see their taxes go up. But don’t forget to apply a little perspective to these figures. For example, a retired person with a portfolio of several million dollars most likely will not earn over $400,000 in taxable income.

2. Small changes start to add up.

By itself, I don’t think moving the highest tax bracket back to where it was in 2018 is that big of a change. But President Biden is also proposing a donut hole for FICA taxes to generate more revenue for Social Security.

Currently, workers only pay a 6.2% FICA tax on the first $142,800 of earned income. President Biden’s proposal would also tax earned income earned above $400,000. Add that additional 6.2% to the 2.6% increase for high earners, and these adjustments will start to add up for a lot of folks. And on top of that, President Biden is proposing that very high earners who make over $1 million pay 39.6% on capital gains in addition to the 3.8% Medicare tax.

Again, these taxes would all apply to annual earned income, not the net worth of your nest egg. Our typical Keen Wealth client won’t have to worry about these tax increases in retirement. But your kids and grandkids who are high earners need to be having conversations with their fiduciary advisors about potential adjustments to their own financial plans in the event that these proposals become law.

3. Time to review your estate plan.

From a retirement perspective, President Biden’s tax proposals could have the most significant impact on estate planning.

Currently, if you leave real estate or a large investment portfolio to your heirs, the cost basis for that asset is reset to its current value as of the date of death, not the difference between what you paid for it and what it’s worth now. This limits the capital gains tax that heirs have to pay.

President Biden’s plan may eliminate the cost basis reset otherwise known as the “step-up in basis." It’s unclear whether your heirs would inherit your original cost basis or if the government would set the basis at a different level. Either way, the end result would be a big tax increase on those inherited assets for people at all income levels, not just high earners. Retirees might need to investigate some gifting and charitable giving strategies to limit those kinds of tax burdens.

4. Prepare, don’t repair.

Again, all of the topics we discuss in this episode are just proposals at this point. I could see some becoming law, such as moving the highest tax bracket back to 39.6%. I’m more skeptical about eliminating the step-up in basis, which would make it very difficult for families to keep things like farms and other illiquid assets. Other ideas, such as reducing charitable giving deductions for high earners and bringing back the first-time homebuyer credit, could look more or less attractive in a few months depending on how COVID-19 recovery progresses. We also don’t know yet if President Biden will arrange his tax plan around a more specific objective, such as increasing government revenue to help folks impacted by the pandemic or to pay for some larger projects he’s discussed in the past.

Still, thinking through these proposals does give us a strong indication of where tax policy could be headed. The sooner you start discussing various scenarios with your fiduciary advisor, the less stressful your tax planning is going to be next year and beyond.

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About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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