With one of the most contentious elections in history behind us, President-elect Joseph R. Biden, Jr. is set to take office on January 20. In anticipation of a new administration, high earners especially are left wondering--how will the Biden presidency affect me financially? Until Biden takes office and begins enacting changes, we won’t know for sure what to expect. But based on his official campaign platform, past interviews, and projections, there are some changes that seem likely.
Now that Inauguration Day is on the horizon, what challenges can high earners expect from the Biden administration?
Challenge #1: Higher Personal Taxes
Much of Biden’s tax plan focuses on raising taxes on earned income and capital gains for individuals with high incomes. It is estimated that approximately 80% of tax increases would affect the top one percent of income earners. The Penn Wharton Budget Model estimates that taxpayers with an adjusted gross income of over $400,000 would see an average decrease in after-tax income of 17.7%.1
Although most direct tax increases are expected to apply to individuals with incomes over $400,000, including increased individual income taxes, capital gains taxes, and payroll taxes, some may hit more broadly. For example, the 12.4% Social Security payroll tax, which currently phases out on income over $137,700, may apply to income even as high as $400,000 or more.2
Challenge #2: Higher Corporate Taxes
Under Biden’s proposed tax plan, corporate tax rates are expected to rise to 28%, up from the current 21%. Additionally, he may set a minimum tax of 15% on “book income” or profits reported to shareholders, and increase the taxes on foreign earnings of U.S. companies with operations overseas from 10.5% to 21%. This would effectively tax U.S. multinationals more heavily than their foreign competitors and discourage offshore operations.3
Challenge #3: Lower Economic Growth
When you tax something, you get less of it. Increased taxation of individual and corporate income discourages risk-taking and economic growth. While those with lower incomes “would not see their taxes increase directly, [they] would see lower investment returns and wages as a result of corporate tax increases,” reducing their after-tax income.1
The Tax Foundation expects the Biden tax plan to reduce GDP by 1.6% over the long term. Their model estimates that the top 1% of earners would see their long term after-tax income decline by 7.7%, and that all taxpayers on average would experience a 1.9% decline in after-tax income.2
Challenge #4: Eliminated Real Estate Tax Breaks
If rumors that Biden may eliminate the Section 1031 like-kind exchange become true, real estate investors would lose the ability to utilize this common workaround for tax deferment. These types of exchanges have taken place in the real estate industry for years and have been a part of the IRS code since 1921. Under current law, real estate investors can delay capital gains taxes when they sell properties and direct earnings into new investments--assuming they follow the IRS’s regulations.4
Challenge #5: Reversals to the Tax Cuts and Jobs Act of 2017
The Tax Cut and Jobs Act of 2017 included several advantageous tax changes for high earners and business owners--including lower personal taxes on income from most pass-through business entities.5 Biden is predicted to eliminate many aspects of the TCJA.
Challenge #6: Higher Estate and Gift Taxes
Biden has been cited as saying he’d likely restore estate and gift taxes to pre-TCJA levels.2 Any eligible assets gifted above that amount would be likely taxed at a rate of 40 percent--unless the Biden administration changes it otherwise.6
We could begin seeing changes soon after Biden takes office. He has spoken about changes occurring on “day one” of his administration. It’s also possible that some changes may be retroactive to January 1, 2021. As the year unfolds and potential changes become law, it will be important to coordinate with trusted financial professionals, such as your investment advisor, tax accountant, and estate planning attorney.
This content is developed from sources believed to be providing accurate information, and provided by Sapient Investments. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.