By Joe Arnold, AIF®
Changes come with every new administration. Whether it’s taxes, immigration policy, or Social Security, changes are on the horizon. What do these possible changes mean for you? It’s important to take these factors into consideration for your financial planning. If you haven’t looked at your financial plan recently, this is a great time to reassess.
Social Security Reform
The Social Security Administration has projected a Social Security shortfall by the year 2035. (1) President Biden has proposed several key changes intended to address the general issue of long-term Social Security solvency while also making benefits available to certain populations. Biden has proposed to increase Social Security Benefits to 125% of the federal poverty level, increase benefits for Americans who have been receiving payments for 20 years or more, and pay greater benefit amounts to widows and widowers. (2) The President has proposed to fund the expansions, in part, by imposing higher Social Security tax rates on earnings between $400,000 and $600,000. (3)
Estate Tax Law Changes
The Biden plan includes changes to the taxation of intergenerational gifts and estates. The plan could include a repeal of the “step-up in basis” that currently allows heirs to legally avoid paying tax on capital gains prior to the transfer of assets. In addition, the maximum long-term capital gains (LTCG) tax rate could increase from its current 20% to a new cap of 39.6%. The lifetime Generation-Skipping Transfer Tax (GSTT) exclusion, currently set at $11.7 million for 2021, is already scheduled to sunset in 2026, resulting in the imposition of estate taxes on estates exceeding $5.8 million. Additional proposed legislation could further reduce the exemption to $3.5 million, the limit in 2009. (4)
Changes To 401(k) Plans
The Biden administration has reportedly proposed to change the way contributions to a 401(k) plan affect tax liability. The plan would replace the traditional tax deferral with a flat 26% tax credit. The change would have the effect of equalizing tax deductions between income brackets. Since lower earners are taxed at lower rates, tax deferrals under the current structure results in greater current-year tax savings for high-income earners. The Biden plan would also create “automatic 401(k)” accounts, designed to offer the benefits of a 401(k) plan to individuals who are not offered retirement plans through their jobs. (5)
Reinstating The Pease Limitation
An additional provision of the Tax Cuts and Jobs Act (TCJA) could be rolled back: the repeal of the Pease Limitation, which was first introduced in 1991 and has since been repealed and reintroduced twice. The Pease limit began to incrementally reduce the tax deduction value by 3% on certain itemized deductions for taxpayers whose adjusted gross income (AGI) exceeded specific thresholds (which changed each year). In 2017, the last year before the recent repeal, the AGI limit was $261,500 for single filers. If the Pease limit were reinstated, high earners would lose the tax saving benefit of commonly itemized deductions.
Right now is a good time to revisit your financial plan given these possible changes. We at Foundation Wealth Advisors, LLC are happy to talk to you about how these changes will affect your estate and retirement plans and how we can help mitigate their impact. Schedule a complimentary appointment by calling (440) 899-7535 or emailing me at jarnold@foundationwa.com.
About Joe
Joe Arnold is an independent financial advisor and the founder and president of Foundation Wealth Advisors, LLC, an independent firm whose advisors provide private investment management for individuals and families, as well as retirement plan consulting for small and mid-sized businesses. With 20 years of experience in the financial industry, Joe specializes in providing objective advice to individuals, as well as transparency in building and managing company 401(k) retirement plans. He is committed to putting his clients’ best interests first in all decision-making and recommendations. Based in Westlake, Ohio, he serves clients in the Cleveland, Akron, and surrounding areas, as well as throughout the country. Joe received a bachelor’s degree in business administration from Cleveland State University and is an Accredited Investment Fiduciary® (AIF®). He has been featured on national television, including CNBC and FOX Business, and quoted in various publications, including The Wall Street Journal, CNN Money, Forbes, and others. Joe lives in Rocky River, Ohio, with his wife, Allison, and their two grown children, Kevin and Keira. An avid golfer, he is a former Class A PGA of America teaching professional and NCAA Division 1 athlete. When he’s not working, he enjoys playing golf, working out, and honing his culinary skills. To learn more about Joe, connect with him on LinkedIn.
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(1) https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
(2) https://joebiden.com/older-americans/
(3) https://www.wealthmanagement.com/high-net-worth/guide-potential-tax-law-changes-under-biden
(4) https://www.jdsupra.com/legalnews/the-new-administration-brings-several-7260938/
(5) https://www.myvaluestocks.com/biden-401k/