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Financial Challenges For High Earners During a Biden Administration Thumbnail

Financial Challenges For High Earners During a Biden Administration

Updated January 20, 2021

With one of the most contentious elections in history behind us, President Joseph R. Biden, Jr. took office on January 20, 2021. With a new administration, high earners especially are left wondering - how will the Biden presidency affect me financially? 

Challenge #1: Expect Higher Taxes

Much of Biden’s proposed tax plan focuses on raising taxes for high earners, corporations, and capital gains. It’s estimated that approximately 80 percent of tax increases would affect the top one percent of income earners.1 

For those earning over $400,000 annually, or over $1,000,000 annually, Biden is projected to raise taxes including individual income, capital gains, and payroll taxes.2 Households with an adjusted gross income under $400,000 a year or less, will likely see less dramatic tax changes, if any changes at all. 

Challenge #2: Deductions May Be Limited

Under Biden’s proposed tax plan, most deductions, including retirement account contributions and qualified charitable contributions, may be limited to an approximate 26-28 percent maximum deduction (provided through a refundable credit). 

The details of this change would benefit taxpayers in lower brackets, while those in the higher brackets would lose some of the value of traditional deductions.4 

These changes could make Roth-type retirement account contributions more valuable for higher earners, while making tax-deferred contributions to traditional IRA, 401(k), and cash balance plans less valuable. 

Challenge #3: Real Estate Loopholes Could Be Eliminated

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 1921.5 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 as to what defines eligibility for Section 1031 exchanges.

Challenge #4: Elimination of Fossil Fuel Subsidies

The elimination of fossil fuel subsidies could affect your earnings and increase the price of many goods and services. Although increased public awareness regarding the impact of fossil fuel production on the climate has led to approximately $14 trillion divested from fossil fuels globally (as of September 20206), Biden is expected to continue the push to end U.S. fossil fuel subsidies in an effort to combat climate change and reach net-zero emissions within 30 years.

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.8 

Biden is predicted to eliminate some aspects of the TCJA – including reverting the top individual income tax rate from 37 percent to 39.6 percent and restoring the Pease limitation on itemized deductions. 

Biden has also proposed increasing the corporate tax rate to 28 percent and instituting a 15 percent minimum tax on profits "so that no corporation gets away with paying no taxes".3

Challenge #6: Raising of Estate and Gift Taxes

Biden has been cited as saying he’d likely expand the amounts collected from estate and gift taxes by reducing the current exemption to $3.5 million.2 Eligible assets gifted above that amount would be taxed at a proposed rate of 45 percent.2 

Interested in more? 

We could begin seeing changes soon. If you’re unsure whether or not your financial situation could be affected, reach out to us. 

You can read more here about the measured actions that we've considered for clients while Planning for a Biden Administration (https://openwindowfs.com/insight/planning-for-a-biden-administration). 

Or consider taking a deep-dive on tax planning through this presidential cycle and the next (2024) (https://openwindowfs.com/insight/tax-planning-for-physicians-keep-more-of-what-you-earn). 

  1. https://budgetmodel.wharton.upenn.edu/issues/2020/9/14/biden-2020-analysis
  2. https://taxfoundation.org/joe-biden-tax-plan-2020/
  3. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/what-joe-biden-s-us-tax-plan-could-mean-for-big-tech-60549176
  4. https://taxfoundation.org/bidens-proposal-would-shift-the-distribution-of-retirement-tax-benefits
  5. https://www.americanbar.org/groups/real_property_trust_estate/resources/real_estate_index/section-1031/
  6. https://www.statista.com/statistics/1090801/value-fossil-fuel-divestments-worldwide/
  7. https://www.reuters.com/article/us-usa-biden-fossilfuel-subsidies/biden-plan-to-end-u-s-fossil-fuel-subsidies-faces-big-challenges-idUSKBN28B4T2
  8. https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-business-taxes
  9. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax