I'm Stephanie Sammons, a CERTIFIED FINANCIAL PLANNER™ and the Founder of Sammons Wealth Management. I help successful women professionals who are in midlife plan for their ideal retirement. Learn more about planning, saving, and investing for your ideal retirement at Sammons Wealth Management.
The Biden Tax Plan - What You Need to Know

Show Notes for this Episode:

If Joe Biden is elected the next President of the United States, changes in the tax laws are possible. This is especially true if we have a Democratic sweep vs. a split Congress. A Democratic sweep is the most likely scenario where the Biden Tax Plan could be implemented. Otherwise, it is unlikely that all of the proposed changes would get through Congress.

It’s important to remember that Presential Elections don’t drive the markets. Many other factors like interest rates, the economic outlook, company earnings, the dollar, and stimulus all have much more of an impact on how the markets perform in the near-term. Over the long-term, the trajectory has been upward regardless of who is in office.

If you would like to hear more about how markets have performed through past presidential elections, check out this episode of the podcast: The Presidential Election and Your Retirement Plan.

Election years are consistently volatile for the markets and you should expect this year to be no different!

There also seems to be some misunderstanding about the Biden Tax Plan that I wanted to provide some clarity on in this episode. If you or you and your spouse earn more than $400,000 per year in income, it is likely that you could be impacted by these potential tax changes.

It is not uncommon to see tax law changes with a new administration, as well as new spending and investing offsets. For example, part of Biden’s plan is to invest in clean energy and infrastructure.

With Covid-19, the level of stimulus that has been infused into the economy has significantly increased the national debt. Raising taxes is also one way to pay for that debt.

In this episode you will learn:

  • The 3 possible outcomes for this year’s presidential election
  • A quick overview of how markets have performed through past presidential election years
  • The Biden Tax Plan Highlights
  • Whether or not you could potentially be affected by the Biden tax plan proposals based on your income level

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Welcome to episode 65 of the retirement money gal podcast. Wow. I can't believe we're at 65 episodes. That's so exciting. We're the next target is 100 episodes today. I am going to be talking about the Biden tax plan and what you need to know. I've been getting a lot of questions about this, and I think that there is some confusion and maybe some misunderstanding about what this tax plan entails. So I wanted to clear some of that up today without getting too deep and too technical. I don't want to bore you. Obviously. There is a lot, if you go deep on this, but we're just going to hit the highlights. Before I get into that, I wanted to remind you that even though it may be tempting to try and predict who wins this election and what will happen next, please, don't go to Vegas on me with your financial and investment decisions.

It doesn't matter who is in the white house. When it comes to the markets, the markets have trended upward across administrations for both parties. And there are many other factors that influence how the markets perform other than elections elections. Don't really have that much of an impact. Things like interest rates and earnings company earnings, sentiment of investors. If they're fearful, or if they're greeting events like a global pandemic oil prices, technological advances stimulus, or in the case right now, lack thereof. These are the kinds of things that influence the markets. And the markets are always a leading indicator. They're forward-thinking. They're trying to predict all the collective investors together are trying to determine what's going to happen next. And it's a pretty good proxy for what makes the markets move all of these different factors and the way that all of the investors behave together.

So it's really impossible to predict any kind of short term or near term movement and the markets. And I guarantee you, if you try to do it, if you try to go to cash and, and say, I'm going to sit this out, I'm not gonna, I'm not going to go through these ups and downs while we're waiting to find out who becomes the next president. And we may be waiting a while after election night, I'm just going to sit in cash and then I'll get back in. You will get burned if you do that. And it's just not a good strategy. So stick with the strategy that you have. And hopefully that strategy is a balanced type of portfolio or retirement nest egg that is aligned with your personal financial goals and your risk tolerance and all of these different factors that come into play when determining an investors asset allocation and how you should be invested.

It's different for everybody. And I'm not giving you advice on this. This is something that needs to be determined through a planning process with a financial advisor, or if you manage your own investments, using tools that can assess your goals and your risk level and these sorts of things. So the point is don't try to time. This history shows that the markets have trended upward over the years, over the longterm, regardless of who is in the white house. And I'll just give you this a hypothetical $1,000 investment in us equities in the year 1926 would have grown to nearly $9 million as of June 20th. I mean, June 30th, 2020, according to data from morning star, that's staying invested in doing nothing. And you get that kind of return on your investment over time. So the point is to stay invested, don't try to make a bunch of changes and adjustments and predict the selection with that said there are three potential outcomes for the election.

The first is a Biden win and a democratic sweep in Congress. The second scenario of Biden win with split Congress. Third scenario, a Trump win with split Congress. Those are the three options. Those are the three possibilities that we could see once the votes are tallied. So if we have a Biden win in a democratic sweep, that would raise the, of a Biden tax plan getting through or passing at least some of that plan. It's very difficult though, with any other scenario to see Biden's full tax plan coming into play. So if it's a Biden, democratic sweep, we could see individual and corporate tax rates go up. And I'm going to give you kind of the highlights of what that might look like because it may or may not even affect you. The other thing is Biden has a plan to also invest in things like clean energy and infrastructure. He is pushing for healthcare reform, but if we have a split Congress tax law changes are difficult and healthcare reform is also very difficult. So just some information for you to be aware of. So let's talk about the Biden tax plan.


Has pledged not to increase tax rates on anyone making less than $400,000 a year. So that includes single or individual tax filers, as well as married or joint tax filers. As far as we can tell that's the assumption, doesn't matter if you're single or married, if you earn less than 400,000 your household, then these tax rate increases will not impact you. These various tax rate changes that are being proposed would only impact earnings above that $400,000 threshold as well. So once you get above the $400,000 threshold, that's when you have to start paying attention and really thinking about these tax changes, if indeed they are implemented. Now, I know that many of you who live in large metropolitan areas like myself, I live in Dallas, Texas. And if you have children and you have dual careers, both spouses are working, you're raising a family, you're living in the city.

That $400,000 income threshold, um, is not that uncommon. So even though it's supposed to only affect 1.8% of taxpayers, a lot of those income earners in that higher level income bracket are living in big metropolitan areas. So just something to point out there. Overall, Penn Wharton made a projection, did a projection, and they have estimated that people over this $400,000 threshold, when all is said and done, if all of the Biden tax plan was implemented, you would see about an 18% drop in your after tax income. That would be the impact to you if you earn more than $400,000 a year. So something, something to think about there. All right, so let's look at some of the highlights of the Biden tax plan. The top tax rate would go from 37% to 39.6%, the top income tax bracket, if you will, that rate and that 39.6 top income tax rate is basically where we were a few years ago before the tax cuts and jobs act was passed.

Now, this act is scheduled to sunset or go away in the year 2026. So basically with this tax law change Biden's plan would move that up a little bit. He would move up the sunset to where that 39.6% top rate would come back into play. And that's what we had before for the top income earners. The other tax brackets would stay the same. And again, the assumption is because it's not clear yet that this would be for individuals and couples who earn more than 400,000 a year. That's the top tax rate proposed the qualified business income deduction would be eliminated for high earners or those who earn more than 400,000. So those of you who are business owners, who took advantage of the qualified business income deduction this year, if you earn more than 400,000, that goes away for you and under the Biden tax plan, there would be a cap on the value of itemized deductions.

And that cap would be at 28% now 90% of claim, the standard deduction today. So not as many people are itemizing anymore because the standard deduction is higher. And it just makes more sense. And it's, it's simplified tax filing for many, many people, but if you do itemize things like your mortgage interest and your state and local taxes, your property taxes, then these are the kinds of things that will get capped or could be limited. The state and local income tax deduction is already limited to 10,000 a year. So that would probably still be in effect the Biden plan would equalize tax benefits of retirement plans like 401ks and IRAs retirement plans, where you are able to deduct your contribution. And basically what this does is it makes these types of contributions more valuable for lower income earners. It essentially lowers the tax burden for anyone with an income tax rate that is under 26%.

So this would not impact the nondeductible retirement plans such as Roth, IRAs and Roth 401k contribution. Next, there would be an expanded child tax credit. So the current tax credit is $2,000 per child under the age of 17. And this tax law change would be $3,600 for children under the age of six tax credit and a $3,000 tax credit for all other children under 17. Another tax credit that would be expanded is the first time home buyer credit long term capital gains on income greater than a million dollars in earnings would be taxed at ordinary income tax rate. It's most of you probably pay 15% or 20% on your longterm capital gains. When you go to sell positions or holdings in your taxable investment account, you're paying 15% or 20% depending on what your income is. So this increase in longterm capital gains taxes will only come into play. If your income exceeds 1 million.

Another proposal of the Biden tax plan is the elimination of the step up in cost basis on inherited assets at death. So the way that works now is if someone passes away and you inherit their estate, you inherit their assets. Those assets are priced at today's fair market value based on the date of death. So any prior gains on those assets that the deceased person experienced are essentially wiped away, and you start with a clean slate with what today's value is based on the date of death of the person that you are receiving the inheritance from. Now, there have been two previous big efforts to undo the step up in basis rule. And both of those were unsuccessful. There are just a lot of challenges to this one challenge, being that in many cases, it's hard to go back. If the person did not keep good records and figure out what the person paid for various assets that they owned in their estate.

So it's highly unlikely. This will happen, but it could. So it's just something to be aware of. And then the last highlight I wanted to share was a 12.4% social security payroll tax for wages above 400,000. So currently there's a 12.4% social security payroll tax in effect. And your employer pays 6.2% of that. The employee pays 6.2% of that. So you share in that tax 50 50 business owners pay that full amount. So with this proposed change, once you get to wages above 400,000, then the social security tax would kick back in right now it's capped at 137 point $737,700 in income. That's where the social security payroll tax stops. Well, now it would kick back in if this plan was implemented for those who earn greater than 400,000. So the bottom line here is that if you think your earnings will exceed 400,000, whether are single or married, then the Biden tax plan could impact you depending on the outcome of the election.

And depending on what happens with Congress and without getting too political here, I mean, you can probably figure out who I might be voting for given that I am a part of the LGBTQ community. So it's okay. That's okay. The tax laws may change and that some of them, this may pay more in taxes than we pay today. It really all comes down to your values and what you believe is right and wrong, and you have to vote based on what you believe. Now, again, many of these proposed changes in Biden's tax plan may or may not ever come to fruition. As we get closer to the end of the year, we will have a lot better idea of what to expect. And that will be the time to really start strategizing and thinking about what you can do to prepare for these potential changes to the tax code that could be implemented.

So what I'm going to do at the end of the year is I'll do a year end tax planning episode and walk through some potential tax planning strategies that you could take advantage of before the end of the year. I also did one of these last year. So it's something that I plan to do every year, but right now there's no point in talking tax planning strategy, because this is all up in the air. We just have no idea what the outcome of the election will be. So with that, that get out there and vote and don't stress out about the volatility and the frenzy that's getting ready to start happening, or it's already happening. It's kind of like a circus going on here, but try not to get too caught up in all of that, just stay the course. You will get through this.

We all will get through this, and then we'll have more clarity at some point, hopefully by the end of the year, we will have a much better idea of what this country is going to look like and what have to look forward to politically, economically and financially. So I hope this helps give you a better idea, maybe a little more clarity on what the Biden tax plan is all about. If you have specific questions, I'm doing some Q and a episodes for this podcast. In fact, I'm going to do another one next week, but please email me at Stephanie at retirement money, gal.com with your questions. And I may or may not. It just depends. Try to address one of your questions on a future episode, you can also access all of the archives and listen to past episodes at retirement money, gal.com. In this episode, I did refer to a prior episode where I talked about the presidential election and your retirement plan, and that was episode number 59. So you can go to retirement money, gal.com forward slash the number five, nine 59. If you want to go back and listen to that. And that episode, I dive into a little bit more detail on the numbers and how the markets have performed throughout all of the election cycles that we've experienced in this country. So you might want to check that out with that. Thank you so much for listening.

I look forward to being back with you next week

This podcast is for informational and educational purposes only. Please do not consider any of the content as personalized financial investment, tax, or legal advice.

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