WHAT COULD BIDEN’S PRESIDENCY MEAN FOR YOUR FINANCIAL FUTURE?
- \ Gerard Gruber
- December 18, 2020
In 2021, Joseph R. Biden, Jr. will unseat current President Donald J. Trump as the 46th President of the Unites States. At this juncture, many Americans are starting to wonder how his proposed legislative...
In 2021, Joseph R. Biden, Jr. will unseat current President Donald J. Trump as the 46th President of the Unites States. At this juncture, many Americans are starting to wonder how his proposed legislative changes may affect their financial realities in 2021 and beyond.
Here we take a look at some of Biden’s proposals, evaluate how they could affect you in the future, and what you can do to plan ahead and protect your assets.
Potential Estate Tax Changes
Additionally, Biden has been cited as saying that he may repeal these TCJA benefits for high-income which would likely include the TCJA’s higher tax-exempt limit for estate inheritances and gifts. If so, those planning on passing along an estate inheritance greater than $5.49 million (a figure based off of 2017 pre-TCJA numbers, but would be adjusted for inflation) may need to re-strategize their estate plan.
Some options to prepare for this possibility include making gifts to your children or charity to use as much of the exemption as you can in 2020 before any tax changes go into effect. Or, in some cases, it may be beneficial to sell portions of your estate to certain types of trusts that can help preserve your estate as you prepare to pass it on to children or grandchildren.
COVID-19 Response
Biden’s plan to restore the economy to pre-pandemic levels of growth is rooted in establishing a “rigorous public health response” in order to navigate a “stronger, more effective reopening.” [ii] In order to do so, he plans to:
- Offer premium pay for health care workers
- Grant emergency paid leave for those who have contracted COVID-19
- Offer free and reliable testing to every American
- Hire 100,000+ workers to build a national contact tracing workforce
Of course, these changes will not go without cost which could potentially trickle down in the form of additional taxes or the like. No one knows for sure how this plan will play out with certainty, so we will have to remain vigilant in order to prepare once those determinations are made.
Social Security
Of course, it’s no secret that the Social Security trust fund was in bad shape before the pandemic. In April, the Social Security Administration predicted it would run out of funds as soon as 2035, at which point only 79% of benefits would be payable. [iii] But, the effects of COVID-19 have dealt it another blow. Fewer workers in the economy to fund the program have accelerated the depletion of reserves.
President-elect Joe Biden’s plans for Social Security include proposals to expand benefits and also extend the program’s solvency. Of course, this would come at the expense of more payroll taxes for high earners to fund the program.
Essentially, Biden’s SS platform include the following key benefits increases:
- Eligible workers would get a guaranteed minimum benefit equal to at least 125% of the federal poverty level.
- People who have received benefits for 20 years would receive a 5% increase.
- Widows would receive roughly 20% more per month.
- A coronavirus-stimulus relief increase of $200 a month during the pandemic.
To pay for the changes and attempt to extend the life of the program, Biden would apply Social Security payroll taxes to individuals making $400,000 and up.In 2020, only wages up to $137,700 are subject to those rates.
401K Plans
The Biden administration could drastically alter the regulation of employer-sponsored retirement plans by ending upfront tax breaks for contributing to traditional 401(k) plans and replacing them with flat-tax credits. [iv] The goal would be to equalize benefits across the income scale and allow lower to middle income families to save more.
Essentially, under this plan, someone making 500K a year would get the same tax credit as someone making 50K a year for their identical retirement plan contribution. The credit would also be refundable, so employees earning too little for the credit to offset their income tax liability would still receive the full value.
The result? 401K plans would be less valuable for high-income earners and more valuable for low-income earners. High-earners will have to seek alternative, tax-friendly savings vehicles to stash away money for retirement including traditional IRAs, Roth IRAs, and other non 401(k) plans.
Unfortunately, this could remove the incentive for small business owners to offer matching contributions or even offer a plan in the first place.
Top Income Tax Rules
Biden also proposes to raise the individual income tax rate for individuals earning higher than $400,000 from 37% to 39.6%, which could cause many businesses and companies to rethink their compensation structures to help their employees avoid falling into this bracket. Things like income deferral, nonqualified deferral opportunities, or variable compensation packages may become more popular should we see this hike pass. And for companies with defined benefit plans, we could see people finding creative ways to move nonqualified benefits into their defined benefit plans.
Remain Vigilant
Although no one knows for sure if and when these changes will occur—since Biden will still have to wrestle with his Republican constituents to see these legislative measures pass into law—it is best to be educated and prepared for the impact these changes could have on you and your financial plan. Consult with your financial professional to see if you should make changes now or start putting transition measures in place for the future.
If you need help navigating the ever-changing economic and financial landscape, the advisors at Harbor West are here to help. We specialize in helping individuals and families make the most of their time and resources to build wealth and protect for the future. Feel free to take a look around our website to learn more about our comprehensive wealth management services, then schedule a call with one of our advisors to get to know us on a more personal level. We look forward to hearing from you soon.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice.
Harbor West is a division of NorthEast Community Bank. Securities and Advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.
i https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax 9 December 2020
[ii] https://joebiden.com/beat-covid19/ 9 December 2020
[iii] https://www.cnbc.com/2020/11/12/bidens-platform-calls-for-big-changes-to-social-security.html 9 December 2020
[iv] https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/2021-irs-401k-contribution-limits.aspx 9 December 2020