Tax Implications for US Investors Under President Biden

02.02.2021 - Craig Richards, Head of Tax Services

Changes in government inevitably bring new priorities and policies, one being the area of taxes. Fiduciary Trust International Director of Tax Services Craig Richards examines possible tax implications for individuals under President Joe Biden’s new administration.

With President Joe Biden now in office and a Democratic majority in Congress, we can be reasonably certain changes to tax policy are on the horizon—we just don’t know where and when. As a candidate, President Biden outlined a number of potential tax changes on his radar, including tax increases for those in the highest income brackets—that is, the top 1% of income earners.

That said, the administration has a lot to deal with right now—namely coping with the pandemic. So, any changes in tax policy aren’t likely imminent. To put it into perspective, former President Donald Trump’s tax legislation took effectively 11 months—and that was without a crisis like COVID-19.

Changes at the Top

While President Biden was very clear during his campaign that income tax rates would go up for the top tier, he didn’t disseminate a lot of detail, so we have to make some assumptions. On the individual side, currently (for the year 2020) the top tax rate is 37%, which was set by the Tax Cuts and Jobs Act (TCJA), signed in 2017 and enacted in 2018. Prior to the TCJA, the top rate was 39.6%.

We don’t know the exact cutoff in terms of income that would fall into the top tax rate, although he had targeted those making over $400,000 in various communications. For 2020, the top 37% tax rate applies to single individuals with taxable income of $518,400 and up, or $622,050 and up for married couples. We don’t yet know if those thresholds will remain, or would drop to $400,000, and for whom.

The other areas of concern for investors are taxes on long-term capital gains and qualified dividends, which have historically been taxed at preferential rates. For 2020 single individuals pay at a rate of 15% if their taxable income is above $40,000 and at 20% if over $441,450. Married couples filing jointly pay at a rate of 15% above $80,000 AND 20% if over $496,600. This could be raised for taxpayers with income above $1 million, although it’s not clear if that’s taxable income or adjusted gross income.

Thus, wealthy individuals would no longer get the tax benefits associated with long-term capital gains and qualified dividends; rather, they would pay ordinary income tax rates, which would be significantly higher. What that ultimately would mean for the market as a whole is unclear. If there is no longer preferential treatment for holding stock long term (more than a year), we might see more short-term buying and selling.

Similarly, if an individual invests in equity of a corporation that pays dividends, currently those dividends are taxed at preferred (lower) rates. So, with higher rates, some investors might construct a portfolio a little differently if the tax rate increases. And, if there is no longer favorable dividend treatment, corporate dividend policies may change—they might decide not to pay them out at all.

That said, it’s important to keep in mind that these tax changes are not likely to apply to everyone, just the top 1% of earners. Additionally, the rules don’t apply to the portfolio construction of retirement accounts, such as 401k plans; however, distributions from retirement accounts would be taxed at a higher rate (39.6% vs 37%) for the top 1% of earners.

Deductions, Social Security Wages and Estates

We also think it’s likely deductions will change under President Biden. We may see a cap on itemized deductions, such as a return of the PEASE limitations which the TCJA repealed. Named for Ohio Congressman Donald Pease, they were a way to limit the dollar amount people could claim (deduct) on their income tax returns. (For example, charitable contributions, mortgage interest, etc.)

In addition, there could be changes to how wages are taxed for financing Social Security (SS). Most individuals pay 6.2% and their employer pays 6.2%, for a total SS tax of 12.4%, taxed on a maximum of $137,700, as of 2020. Under President Biden’s plan, an individual would pay SS tax up to that maximum, and wouldn’t pay any addition until reaching $400,000. So, wealthier individuals would pay additional SS tax on the amount above $400,000, which could be significant.

On the estate side, currently individuals can exclude $11.7 million (for 2021) from estate taxes or gifts during their lifetime—which again was set by the TCJA. Under President Biden, we could see that amount reduced or rolled back to some degree to what it was prior. We encourage many of our clients to give away money where it makes sense to do so, and they often create trust structures to do so. If the threshold changes to take advantage of the tax benefits of gifting, we could see giving habits change.

SALT and Credits

There are a few areas which could be good news on the tax front for many individuals. State and local taxes (SALT) are an issue House Majority Leader Nancy Pelosi and Senate Majority Leader Chuck Schumer have been at the forefront of. The TCJA limited SALT deductions to $10,000, no matter what city or state one lives in. So, individuals living in a high-tax jurisdiction like California or New York (where Pelosi and Schumer reside), pay a lot more taxes—in many cases much more—than individuals living in other states, but could not deduct a proportionate amount. Taking away that limitation could be a game changer. It would benefit individuals who itemize their deductions, which tend to be those in higher income tax brackets.

While most of President Biden’s tax changes would likely apply to wealthier individuals, we could see new credits that would benefit many more people, including incentives for low-income home buyers, and an increase in credits for those with children. President Biden has continuously said he would not raise income taxes for lower- and middle-income families, so credits are gravy for most taxpayers.

While no one likes taxes, the reality is that stimulus measures provided to get people and businesses back on track amid the COVID-19 pandemic have to be paid for somehow. There’s also been a lot of talk about the need for improvements in infrastructure, including road and bridge repairs. Again, these improvements need to be financed. For now, it’s wait-and-see what unfolds in the year ahead.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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