*This article is in no way an endorsement for any presidential, congressional or local political candidate. It is being provided solely for informational purposes and based on presidential administration campaign material available at the time of publication.
No matter who you are voting for on November 3, 2020, you may want to start considering the potential legal, financial, and tax impacts that a Democratic sweep might have on your estate planning. As I hope you learn from this article, there are a number of reasons why you should start strategizing now, because if you wait until after the election, it will very likely be too late.
Although the election results are impossible to predict, most polls show Democratic party candidate, Joe Biden, with a healthy lead over Republican party candidate, Donald Trump. The Democrats are also poised to take a majority in both houses of Congress. Such a Democratic sweep will likely have a far-reaching impact on a number of policy fronts, including social, economic, financial, tax, estate planning, and retirement.
Positive long-term economic and employment outlook
The general consensus among many economists is that a total Democratic sweep would bring the biggest boost to the economy because of Biden’s long-term plans to spend trillions on infrastructure, education and the social safety net while boosting trade and immigration.
Specifically, economists at Moody’s Analytics found that “the economic outlook is strongest under the scenario in which Biden and the Democrats sweep Congress and fully adopt their economic agenda.” Moody’s recent report also finds that Biden’s economic proposals, if enacted, would create 7.4 million more jobs than would Trump’s plan, and the economy would return to full employment in the second half of 2022, nearly two years earlier than under Trump’s plan.
Goldman Sachs, the investment bank that sent several high-profile employees into the Trump administration, recently echoed these opinions in a recent note from its chief economists, which highlights that Biden’s long-term government spending plan, combined with historically low interest rates, is forecasted to speed up the economy. Moreover, Goldman Sachs found that Biden’s economic plan “would likely result in substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook.”
Economist from both firms also found that the higher taxes proposed to fund part of these plans would not slow the economy in a meaningful way. Moody’s argues, more specifically, that greater government spending adds directly to gross domestic product and jobs, “while the higher tax burden has an indirect impact through business investment and the spending and saving behavior of high-income households.” Goldman Sachs has similar sentiments, finding that Biden’s economic plan “would at least match the likely longer-term tax increases on corporations and upper-income earnings.”
Speaking of those tax consequences and regulations…
While a long-term boost to the economy and employment under a Biden administration has been heavily predicted by many economists, a “blue wave” Democratic sweep will almost certainly result in higher taxes and regulations imposed on most higher net-worth individuals who are not adequately prepared. It is unlikely that a major tax bill would be enacted right away, but there is always the possibility that when legislation does pass it could be applied retroactively to Jan. 1, 2021.
With that in mind, in this two-part series, I will outline the major ways a Joe Biden led administration plans to change tax laws, so you can adapt your family’s finances and estate planning considerations accordingly – even if you are not a higher net-worth individual. You may decide to put off making any actual changes to your estate plan until after the election. However, if you have any big transactions on the horizon, or if you have an estate that could be worth $1 million or more when you die, I suggest you at least start strategizing now. That way, you will have plenty of time to take the appropriate action before the end of the year, which will undoubtedly be a chaotic period regardless of who wins the election.
Focus on high net-worth taxpayer
While Donald Trump has yet to release any formal economic proposals for a second term, Joe Biden’s proposed economic agenda is essentially focused on raising around $4 trillion of new revenue over the next ten (10) years. The vast majority of this revenue would come from increasing taxes on high net-worth individuals.
Under Biden’s proposed tax plan, “high net-worth individuals” are taxpayers earning more than $400,000 per year. Those individuals earning less than that amount would generally not see an increase in taxes, at least in the short-term. At this point, however, it is not yet clear if the $400,000 threshold would apply equally to singles, heads of households, and/or married joint-filing couples.
Increased personal income tax rates on the wealthy
Starting in 2018, Trump’s Tax Cuts & Jobs Act (TCJA) reduced the top federal income tax rates on individuals from 39.6% to 37%. Biden’s tax plan would put the top income tax rate back to 39.6% on personal income in excess of $400,000. This means that everyone earning more than $400,000 would see a tax hike. On the other hand, those making less than $400,000 would see no change in their personal income tax rate and they may even see a decrease in their tax rate.
Although the specifics have not been fully ironed out yet, Biden’s plan would boost tax revenue in a handful of ways:
- Increasing the top personal income and capital-gains tax rates
- Reinstating the payroll tax on higher incomes
- Returning the federal estate and gift tax exemption to prior levels
- Eliminating the step-up in cost basis on inherited investments
- Capping itemized deductions
- Increasing the corporate tax rate
If you do not qualify as a “high net-worth individual” right now, then the proposed tax increases will have little, if any, effect on your taxes in the short term. In fact, the proposed tax plan may even reduce your taxes! Nevertheless, if you anticipate that your income or net worth will increase to a higher level over the next decade and beyond, it would be wise to put a plan in place now that is flexible to account for any changes later.
I mean, who doesn’t want to be making more money in the future?!
Increased estate and gift tax exposure
When it comes to estate planning, the most critical aspect of Biden’s proposed tax increases would be a major reduction in the federal gift and estate tax exemption. Starting in 2018, Trump’s TCJA doubled the gift and estate tax exemption from prior levels, increasing to $11.58 million for single taxpayers and $23.16 million for married couples. Any amounts above this exemption that you give away during your lifetime or transfer upon your death are subject to a flat 40% tax.
The increased exemption amounts under the TCJA will sunset at the end of 2025, but if Biden wins the presidency, the enhanced exemption could be repealed much sooner. In fact, it has been speculated that Biden proposes to reduce the exemption back to at least the 2017 level of $5.45 million for individuals and $11.58 for couples.
There are others who suggest the federal gift and estate tax in the event of a Democratic sweep this year might even return to 2009 levels, when the individual exemption was set at $3.5 million and the estate tax rate was 45%. Seeing that, in the past, lawmakers have made estate tax rates retroactive, it is possible that these changes could be applied retroactively and go into effect as early as Jan. 1, 2021 (also known as a “clawback”).
Higher maximum tax rate for capital gains
One of the most dramatic changes proposed under Biden’s plan involves the way capital gains are taxed. Short-term capital gains (assets held for a year or less) are taxed at the ordinary income tax rates. Under Biden’s proposal, those rates would max out at 39.6%, but the tax rates for long-term capital gains would see an even bigger hike.
Long-term capital gains (assets held for more than a year) are taxed at lower rates than short-term gains to encourage long-term investment. Those rates are currently set at 0% for individuals with annual incomes up to $40,000, 15% for incomes between $40,001 and $441,450, and max out at 20% for incomes above $441,451.
The Biden plan, however, would create an entirely new tax bracket just for long-term capital gains in which gains for individuals with incomes higher than $1 million would be taxed at 39.6%. So, if you are making more than $1 million a year, you would no longer see the benefit of lower capital gains rates.
Given the potential for an increased capital gains tax rate, if you earn more than $1 million a year and are considering a sale of capital-gains qualified assets, or if a sale will bump up your income, you may want to consider accelerating any large transactions, so they are finalized before the end of the year. If this is the case for you, consult with me, along with your tax and financial advisors, right away for guidance about which transactions should be prioritized and how to maximize your tax savings on each one. Keep in mind, if you wait to contact me about such transactions until mid-November, it is unlikely I am going to be able to accommodate your needs, so be sure to act now.
Increased Social Security tax on high-income earners
Another way Biden’s plan would raise tax revenue is by subjecting incomes above $400,000 to the Social Security tax. Currently, the 12.4% Social Security tax—also known as the payroll tax—applies only to the first $137,700 of your income. Earnings above that amount are not subject to the tax, and the cap goes up annually with inflation.
Biden proposes applying the 12.4% tax to wages and self-employment income starting at $400,001. This means the first $137,700 of your earnings will continue to be taxed at 12.4%, but you will pay no Social Security tax on additional earnings up to $400,000. However, any additional earnings exceeding $400,000 would be taxed at 12.4%.
The untaxed gap, or “doughnut hole,” on earnings between $137,700 and $400,001 would close over time with the annual increases for inflation. This change is designed to bolster the Social Security system by ensuring that the highest income levels are eventually subject to the full payroll tax.
In light of this proposed change, if you are expecting a bonus or other special end-of-the-year compensation, you should consider arranging for the money to be paid out by the end of 2020, rather than waiting until the start of 2021.
Remember, don’t panic in the event of a Democratic sweep
Whatever the final outcome of the election this November 3, 2020, there are estate plans and solutions that can provide protection and tax shelter for your assets. It is clear that if you have an estate valued between $3.5 and $11 million, you need to seriously consider taking steps now to take advantage of favorable estate-tax exemption rates that may never be seen again.
To this end, you should consider opportunities to transfer assets out of your estate now in order to lock in the higher exemption amounts in the event of a Democratic sweep. That said, transferring assets out of your estate, whether done via gifting or other means, can take several weeks to plan, set up, and finalize, so avoid the temptation to wait until after the election to start planning. In fact, you should immediately meet with me, as your Personal Family Lawyer®, to discuss your options and get things started.
By setting your plan in motion now, you can have your strategies in place and ready to go, so you can pull the trigger (if needed) once the election results are in.
Next week, I will continue with part two in this series on how to prepare your estate plan for a Democratic sweep and a Joe Biden presidency.