1. Top Income Tax to 39.6% from 37%
Biden is proposing to raise the top ordinary income tax rate from 37% to 39.6%. The top rate was 39.6% under Clinton and in President Obama’s 2nd term. No recession happened during either period and I feel this would have a minor impact on economic growth.
2. Corporate Tax to 28% from 21%
This may sound bad but corporate tax rates were at 35% from 1990s through 2017. According to CRFB.org, it is estimated lifting corporate tax to 28% would raise $1.1 to $1.3 trillion over the next decade2. Companies would also face a minimum tax of 15% on their global profit and higher taxes on their foreign earnings.
3. Ending step up basis at death
For example, if someone had bought a stock at $10 and it was trading at $30 when they pass, they could give their holding to their beneficiaries with a stepped-up cost basis. Meaning their beneficiary would now have $30 cost basis and have no tax liability if they sold the stock right away at $30. This proposal would remove that, and the beneficiary would inherit their cost basis. If this happened, the beneficiary would have a $10 cost basis and would owe taxes on the $20 gain if they sold right away.
4. Raise Long term capital gains
Currently, if you make over $1M, you pay 23.8% tax on long term capital gains. If this proposal is passed, you be subject to ordinary income taxes (39.6%) on your capital gains. If you believe this tax hike will be passed, you may sell your holding now to lock in your current rate. If you want to buy back the exact same security, you will have to wait 30 days (Wash-sale rule).
5. 401(k) Contributions
Biden proposed equalizing benefits across the income scale by eliminating deductible contributions and instead providing a 26% tax credit for each $1 contributed.
For instance, if you make $100,000, and you’re single, you are in the 24% tax bracket. If you save $10,000 to your 401(k), you have about $2,400 in tax savings. 3
In comparison, a single filer making $40,000 and saving 10% to their 401(k) would have roughly $480 in tax savings. That is because he falls into the 12% tax bracket. This varies because it takes into factor your marginal tax rate instead of effective tax rate.
The idea to increase benefits to low income earners is good but I feel the way this proposed is not. A benefit of a 401(k) is you contribute with pre-tax money and that money can compound over time tax deferred. With this proposal you would contribute with post tax money and receive a tax credit.
6. Social Security Tax
It is projected that with no change Social Security will only have enough to pay for 75% of schedule benefits by 20354. Social Security is currently taxed on incomes between $0.01 and $137,700. Biden’s proposal would add Social Security taxes to income above $400,000 as well.
1 $4 Trillion in 10 years Link
2 Understanding Joe Biden’s 2020 Tax Plan Link
3 CNBC: 401(k) tax breaks Link
4 Social Security Benefits by 2035 Link
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Stocks investing involves risk including loss of principal. Rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs, and when rebalancing a nonretirement account, taxable events may be created that may affect your tax liability.