Our Thoughts

Tax Talk: What Changes Could Be Coming?

When a new administration takes office, you can expect changes to the tax law. FJY CEO, Jon Yankee, sat down with Kendall Coleman, a partner at CST Group, during FJY Live: Tax Talk to discuss the policy changes the Biden Administration may implement and how they could affect you.

Watch the full webinar here: FJY Live: Tax Talk

Jon Yankee:

Can you walk us through some of the Biden Administration’s proposed tax plan? What are some of the key things that clients should be aware of?

Kendall Coleman:

I think the best way to start is to talk about how tax law works. Typically, once the house passes it, then you need a consensus of 60 senators. These days, everything is very 50/50, so that’s not likely to happen. But, there is something called the budget reconciliation and under budget reconciliation they only need 51 votes to pass it, with Vice-President Harris being the tie breaker. It’s my understanding that this can only be done once a year, and they recently did that to pass the bill a couple of weeks ago, so right now it looks like October will be when some of these changes may start being passed.

The big proposed changes that I’m going to focus on are individual tax rates, social security, and capital gains tax.

Individual Tax Rates

Kendall Coleman:

The new administration is proposing to raise the highest individual tax rate back up to 39.6%. In 2018, Trump dropped it to 37%, so that’s going to go back up to 39.6%. You’ll need to be making about $620,000 before that impacts you. The lower brackets should stay relatively stable.

Jon Yankee:

That’s the number where Biden was promising if you make over $400,000, that’s where it’s going to happen.

Kendall Coleman:

Correct.

Jon Yankee:

And this is one tax filing so it’s married filing jointly making $400,000.

Kendall Coleman:

Yeah. He’s used this as a sort of baseline for a lot of the tax laws he’s proposing.

Social Security

Kendall Coleman:

A change to social security is another big one he’s proposing. It’s not great for employers or employees. Right now, 12.4% is born half by the employee, and half born by the employer, to around $145,000 for 2021. He’s proposing that starting in 2022, you pay social security tax up to $145,000, then from $145,000 to $400,000 it’s only the Medicare piece, but then starting at $400,000 again, the 12.4% goes back in place, both on the employer and the employee. So for any highly compensated W2 employees, there’s going to be an additional 12% tax hit on the amount over $400,000. Again, he’s saying he’s going after the wealthier tax payer and that’s how he’s focusing this.

Capital Gains Tax

Kendall Coleman:

The change that really has everybody up in arms and very concerned is the proposal to eliminate the 20% capital gains tax rates on anybody that makes an excess of one million dollars. That’s 20% more on your long-term capital gains assets. The concept behind this was the biggest transfers of wealth are appreciated real estate, the sale of a business, or stock investments that have been held for 30 years. The theory is that if you have more than one million dollars then you can afford an extra 20%, but for many clients, that’s their one asset. Their business is their business, and a 20% hit is a 20% hit. It will be interesting to see if that gets through but that is definitely the one that everybody is most concerned about.

Jon Yankee:

Okay, and that one would include the abolishing of the step up and cost basis, correct?

Kendall Coleman:

Correct. Right now, your individual exclusion is 11.58 million, so you have that much in assets not to pay as state tax. Biden is proposing to take it back down to 3.5 million and increase the tax rate back up to 45%. The worst part is, if you have appreciated assets to get to the 3.5 million, you have to pay tax on the increase of that appreciation at date of death or 90 days after, so in the case of a piece of land, you’d almost have to sell the land or take out a mortgage in order to pay the tax. Who knows if that will get done. I think that’s going to create a lot of estate activity where there’s ways to transfer some of these appreciated assets overtime before that kicks in.

Jon Yankee:

Right, and those are of course the planning opportunities we have and it’s really people who are above that estate tax exemption have this as an issue and the estate tax exemption.

Watch the full webinar to hear more of Jon and Kendall’s conversation on proposed tax law changes and what tax strategies you might consider.