President Biden has unveiled his $2.3 trillion infrastructure plan; now, the focus turns to how the Administration proposes to pay for all (or some of) the measures. While these plans are still subject to significant change, it’s a good idea to keep an eye on key components that could impact your financial strategies and portfolio. Forewarned is forearmed.
Today’s tax rates are among the lowest U.S. citizens have experienced since the inception of the federal tax code in 1913. While corporate taxes are on the front burner, individual tax increases may not be far behind. Below are ten proposed changes we’re watching to see if they make it into the final legislation:
- Increase the top ordinary income tax rate for income over $400,000 to 39.6%. It is unclear whether this is for families or individuals. It is currently 37% as enacted by the Tax Cuts and Jobs Act (TCJA).
- Eliminate step-up in basis at death and potentially create a taxable event at that time.
- Replace deductions for contributions to IRAs, 401(k)s, and similar retirement accounts with a flat 26% credit.
- Increase long-term capital gains rates on income $1,000,000 and over from 20% to 39.6%.
- Unified gift and estate tax exemption amounts would decrease from $11.58M to $3.5M for individuals and $23.16M to $7M for married couples. Portability would remain, and those amounts would be indexed to inflation. There is also talk of doing away with GRAT’s (or requiring a 10-year minimum term and a minimum of 25% gift of the market value of the property). There is also discussion of getting rid of FLP discounts and limiting dynasty trusts and defective trusts.
- The maximum amount of itemized deductions would be no more than 28% for those earning over $400,000. It’s unclear at this point whether that is individual or joint.
- The earned income tax credit would be expanded to include workers age 65 and older, without children living at home, who are considered “childless” for tax purposes.
- The Child and Dependent Care Tax Credit would increase from $3,000 to $8,000 for one child and from $6,000 to $16,000 for two or more children. The maximum reimbursement rate would increase from 35% to 50%. The Child Tax Credit would increase from $2,000 to $3,000 per child ($3,600 for children 5 years old and younger). As it stands right now, these changes only apply to the 2021 tax year, but there could be an effort to extend the enhancements beyond this year.
- The first-time home buyer credit would be restored with a maximum of $15,000. Under the current rules, there is no first-time home buyer credit.
- Tax-deferred exchanges for real estate performed under IRC 1031 would no longer be available. Similar to IRC 1035, where there can be an exchange of one annuity for another annuity without recognition of gain, IRC 1031 applies to like-kind real estate when one property is exchanged for another held for business or investment.
As we mentioned at the outset, some or all of these provisions may never pass, but being aware of them now to avoid surprises makes sense. We’ll continue to keep an eye on how things transpire and can discuss how the final bill will impact your portfolio and investment strategies when that time comes. If you have questions or concerns, please let us know, and we can discuss them in more detail.