With the election behind us, it is time to look to the future of your wallet. With a new administration and a friendly Congress, we should expect a lot of changes. The following topics are not pie in the sky. These are real proposals that could become a part of our tax code within 12 months or less.
Income Tax Proposals
What income tax proposals will be on the table on January 21, 2021? Let’s take a look.
Maximum income tax bracket:
-A proposed increase from 37% to 39.6%
Earnings that would be taxed at the highest bracket:
-A proposed $400,000 down from the current $628,300
Capital gains tax on investments held by you at the time of death:
-Current capital gains tax at death: none.
-Biden has not identified what trigger will cause the capital gains tax at death, however, we can expect such a tax will be proposed.
-Example: If Bob holds assets with $5 million of unrealized capital gains at the time of his death, his estate could owe $225,000 in capital gains tax.
-That would be $225,000 up from $0.
Tax on estate transfers at death:
-The proposal is to reduce the tax-free transfer of an estate from the current $11.58 million down to $3.5 million.
-Example: John, a retired single taxpayer with $5 million of assets dies. His estate could owe $1.5 million.
That would be $1.5 million up from $0.
Increase both the tax on long-term capital gains and dividends:
-On persons earning over $1 million dollars from 23.8% to 39.6%.
Increase Social Security taxes:
-For those earning over $400,000 by 12.4%.
Limit itemized deductions:
-Historically, the itemized deduction reflected the tax rate.
-Example: If you made a contribution of $10,000 and were in the 37% tax bracket, your taxable income was reduced by $10,000 thus saving you $3,700 in taxes. However, under the Biden proposal, for those earning over $400,000, the tax savings would be capped at 28%. Thus, the tax savings would be reduced to $2,800.
We do not expect this section of any proposed changes to pass Congress as it could negatively affect charities and not-for-profits. Both charities and not-for-profits have a large and effective lobbying presence in Washington.
What can you do to legally avoid these changes at a very low cost? Make as many investments as possible inside your Roth Self Directed IRA.
IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments.