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In the latest budget proposal from the Biden administration, significant changes to tax policies are on the table, and they are aimed at you.
President Biden’s proposed budget for 2025 outlines key priorities for generating more revenue through tax increases. Basically, Biden is asking Americans to fund expansions of programs like the Child Tax Credit, Earnings Income Tax Credit, and Premium Tax Credit, to name a few. However, with a divided Congress, passage of this expensive legislation is uncertain.
Let’s break down the proposed tax changes:
- Top individual income tax rate increases to 39.6% for incomes over $400,000.
- The net investment income tax rate would rise from 3.8% to 5% for those earning more than $400,000 in regular income, capital gains, and pass-through business income combined. The additional Medicare tax rate for those earning more than $400,000 would also increase from 3.8% to 5%.
- Qualified dividends and long-term capital gains would be taxed as ordinary income, plus the net investment income tax, for income that exceeds $1 million.
- Roth IRA conversions would be prohibited for high-income taxpayers, and “backdoor” Roth contributions (where after-tax traditional IRA contributions can be rolled into a Roth IRA despite income limits) would be eliminated.
- Introduction of a 25% minimum tax on those with a net worth exceeding $100 million.
- Goodbye to deferred gains on like-kind exchanges, better known as 1031 exchanges.
These proposed changes could have significant implications for wealth transfer and taxation. We believe the likelihood of these changes passing is low, but they signal the administration’s priorities. If similar leadership takes office, or if Joe Biden is reelected, you can be confident that we will see more of these proposals. Eventually, they could become law.
It’s these kinds of policies that illuminate many blind spots and the need to consider strategies for your situation. Bottom line, if you don’t have someone in your corner helping you make wise decisions, it is likely that you will fall prey to policy changes that rarely get the attention they deserve.
So, how should we be preparing for President Biden’s restrictive tax policy and the sunsetting of the 2017 Tax Cuts and Jobs Act in 2026?
Roth IRA conversions for tax-free growth potential.
If you are likely to be affected by the increase in the highest marginal income tax rate, converting a traditional IRA to a Roth IRA now, when the rate is still relatively low, could be advantageous.
Combine charitable deductions to maximize tax benefits.
If you itemize your deductions and plan on making a large charitable gift, it may make sense to defer that gift if you expect to be in a higher tax bracket down the road.
Utilize in-kind transfers to optimize basis step-up at death.
If you have a grantor trust, you may want to consider moving high-cost-basis assets into your trust and taking low-cost-basis assets of equal value out.
Implement tax-smart investment strategies.
Investors of every income level can implement strategies designed to help manage, defer, or reduce taxes, such as tax-smart asset location and tax-loss harvesting.
While changes may not happen immediately, now is a good time to reassess your financial plan. We recommend that you stay focused on your long-term goals and consult with a financial professional to navigate potential tax changes.
