Potential Tax Changes

President Biden's tax plan includes some pretty significant changes that could impact how advisors build efficient retirement income plans. Learn more about President Biden's tax plan in our FinPlan Friday conversation with Joe.

Tax Clarity | FinPlan Friday | March 2021

FinPlan Fridays

In our video blog series, FinPlan Fridays, Covisum® Founder and President, Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective into the challenges for which Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays, and get helpful tips to grow your financial planning practice. 


Hi, this is Joe Elsasser, CFP®, President and Founder of Covisum and I'm also a practicing financial advisor. Welcome to another FinPlan Friday. Today, we're going to talk about some of the changes that could occur as a result of the Biden tax plan. Now, of course, these are proposed changes and in reality, there's a huge political process, and a lot of negotiation that will have to happen in order for any of these to actually take effect. But there are four changes that we'll address today that we'll want to pay attention to because they would have a really significant impact on how to build efficient retirement income plans.

Changes to Taxation for Current Employees to Pay for Social Security

Currently you pay tax on up to about $140,000 of income. This is FICA taxes where you pay 6.2% as an employee, and the employer pays an additional 6.2% for a total of 12.4% which goes into the Social Security system. The proposal is to continue this structure, but also reinstate the tax for people who earn over $400,000 a year—creating a donut hole.

So, we would have the current taxation structure where you're taxed on about the first $140,000, which is indexed each year for inflation. But then high wage-earners would again begin paying 6.2%, and self-employed people would pay both halves for a total of 12.4% on income over $400,000. So, that would be a pretty significant change for high wage-earners.

Changes to the Step-Up in Basis

Now, a second potential change under the Biden tax plan is a change in capital gains, specifically a change in the step-up in basis. Let's say I bought a stock today and in 20 years that stock triples in value. So, I have this low basis on this high current value. At the point of my death, under current law,  my heirs would get a step-up in basis. So, if they sold that stock on the day after I died, they would pay only the difference between the date of death value and the day they sold it. They would pay very little capital gains tax.

Now, the idea of eliminating the step-up in basis could be one of two things things:

  1. Carryover basis, which is the possibility that they would retain my original purchase price as their new basis. They wouldn't be taxed until they actually sold the asset, but they wouldn't get that step-up in basis that would allow them to sell the asset with very low taxation.

  2. Immediate taxation of the difference between my basis and the value as of the date of death.

Now, both of these situations would create real planning imperatives. Rather than holding assets with the expectation of an eventual step-up in basis, we might be more tempted to make sure that the portfolio is aligned all the way throughout retirement. And avoid playing this balancing game between—it's a pretty good asset, but we've got a big tax liability built up, which is often the case right now.

Changing the Estate Tax Exemption

Now the third major change is a change in the estate tax exemption. When I first got into the industry in 2000 it was a million dollars, and it's bounced all over the place throughout the years. Currently you can have $11.7 million in your estate before you face any estate taxation. The Biden plan proposes to bring that number back down to $3.5 million. Now, that would bring a lot more people back into the fold for estate taxation and could create a lot of different planning opportunities, like gifting earlier on in retirement. It might create situations where life insurance becomes valuable again as an estate planning tool—for mass-affluent and lower-affluent people, it's certainly less valuable than it was 20 years ago. So, there are a variety of planning opportunities that would arise from that estate planning change from the estate tax exemption.

Increasing the Top Tax Rates

Now, right now, the proposal is only to increase the top tax rate from a current 37% under the Tax Cuts and Jobs Act back up to 39.6%—the pre Tax Cuts and Jobs Act level. Right now, that's the only proposed change.

As these issues are negotiated through Congress, you can imagine that there'll be a variety of pressures on both sides to say, "maybe we should bring down some of the other tax brackets. Maybe we should adjust the threshold." Needless to say, I don't think anyone is suggesting that under this new administration taxes are likely to go lower for lower-affluent or affluent taxpayers. If anything, it is potential for higher taxes, whether it's capital gains taxes, estate taxes, or income taxes.

Opportunities for Advisors

So, the next few years before these tax changes have a chance to take hold, there is really a great opportunity to take advantage of some of the historically low tax rates. One of the things that we're doing, and we're seeing other top advisors around the country doing right now, is really looking hard at Roth conversions. Roth conversions can be a fantastic tool, particularly when someone is in a low tax bracket right now.

A second thing that we're seeing quite a bit of is harvesting of capital gains, not just capital losses. Sometimes it makes sense to actually harvest some capital gains and either take advantage of a zero or a 15% tax bracket if it's unlikely that those brackets will be available later on in retirement. Particularly for someone who might be in a 0% capital gains bracket or has some room between the point where their Social Security is fully taxable, and is waiting to be kicked into a higher tax bracket. These are two fantastic techniques to begin thinking about, at minimum. For some clients, implementing now during this era of historically low tax rates might be smart.

Thanks so much for joining us today. We look forward to seeing you next month for another FinPlan Friday.

Roth conversions with Tax Clarity