Blog # 492
Tax Change Update
Since President Biden was elected last November, significant changes have been made from his campaign tax proposals to what is currently being discussed on Capitol Hill. Many of the current proposals have moderated from what was discussed before the election.
As a firm philosophy, we do not think you should generally make investment policy decisions based on proposed legislation, or even based on politics. Stock markets are mostly correlated over the long-term with the earnings of companies and changes in their future earnings expectations, not based on what political party is in control or the direction of individual or corporate tax policy.
We want to update you on what is currently being discussed, in very broad terms. Just as we said last fall, proposals rarely become tax law. There is still a long way to go before tax legislation is enacted, so we are not going to address the many details of the House proposal that was released this week in this post. As the Democratic margin is razor thin, they will need to compromise even within their own party to get any measures enacted.
We encourage you to focus on the trends of the proposals, from what Biden discussed on the campaign to what the House is currently discussing, as well as the historical change/trends of a few major areas of taxes. Viewing tax rates with a historical perspective is quite valuable, as you will see below.
Top Individual income tax rates, for ordinary income: for married filing jointly, for selected years
1980: 70% for income > $215,400
1981: 50%, for income > $86,000
1987: 38.5%, for income > $90,000
1993-2002: 39.6% for income > $250,000, indexed each year higher
2003-2012: 35% for income > $312,000, indexed each year higher
2013 – 2017: 39.6%, for income > $450,000, indexed each year higher
2018-2021: 37%, income > $600,000, indexed (35% for income $400-600K)
Congressional proposal: 39.6%, for income > $450,000; surtax of 3% above $5 million (effective in 2022)
While the Congressional proposed top personal income tax rates are an increase from the Trump personal income tax rates for 2018-present, they would be comparable to the personal income tax rates from 2013-2017 (not including the surtax for earners above $5 million).
Personal top long-term Capital Gains tax rates:
2013- current: 20%
Biden proposal: same as top ordinary income tax, which would be 39.6%
Congressional proposal: much lower rate than Biden proposal
- 15%, if your joint income is between $81,000-$450,000 (similar to current law)
- 25%, if your joint income is > $450K (and potential surtaxes for higher earners to be determined). The 25% tax rate is an increase from the current top capital gains rate of 20%
- Significantly, the current House proposal has an effective date of September 14, 2021, except for transactions that have already been entered into prior to 9/14/21 and close by the end of the year.
- This means that if enacted, and that’s a big if, stock sales after 9/14/21 for high income taxpayers would be subject to this higher capital gains rate.
There will be further negotiation and details to be resolved regarding capital gains rates and effective dates, but it appears as of now that the Biden campaign proposal of a 39.6% capital gain tax rate will not be enacted. It appears that Congress will not pass anywhere near that level for long-term capital gains, which is positive for investors and the stock market in general.
Estate taxes (and related matters)
Currently, each person gets around $11 million of estate tax deductions. For a married couple, this means more than $22 million. If your estate is far below these amounts, you don’t need to worry about incurring any estate tax. If no changes in tax laws were made before January 2026, the exemption amounts were to return to $5 million plus inflation adjustments, per person.
House Proposal: inflation adjusted exemption amount of approx. $6 million per person (down from current $11 million+ per person)
- Under the House proposal, a married couple would not be subject to the estate tax unless their assets were above $12 million, down from the current $22+ million, which was set to expire at the end of 2025.
- Historically, the House proposed exemption amounts are still relatively high, compared to the past.
Notably, the Congressional proposal does NOT include any change in the current step-up in basis upon death, which had been widely discussed. This is positive for estates and beneficiaries of all sizes.
Remember, good estate planning is not just about tax avoidance. The more important aspect of estate planning is making sure that your documents properly reflect your wishes of what happens to your assets when you die. This may not be easy to deal with, but it is vitally important and should be addressed properly and reviewed every 5 years or so. Contact us if you want to discuss this further.
Corporate Income Taxes:
Reagan: 46% to 40% (starting in 1987)
Reagan: 40% to 34% (starting in 1988)
Clinton: 34% and 35% (1990s)
Bush II: 35%
Biden proposal: 28%
Congressional proposal: 26.5%
While Biden and Congressional Democrats are proposing increases in the top corporate tax rate, the rates being discussed are still way lower than corporate tax rates over most of the past 4 decades.
As stated at the beginning of this post, the House proposal covers many other areas, which could impact many clients and taxpayers. As this is just a proposal now, there is no way to know what of the proposed legislation will become law, or what changes will be made before enactment.
- We will be carefully monitoring this proposal and future changes on behalf of our clients.
- We suggest that you consult with your tax advisor regarding your specific situation.
We hope that this post provides you with valuable and timely information, which is always our goal. Please feel free to forward this information to others who you think would find this helpful.
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