By Paul S. McNulty, CFP®
Each new presidential administration comes in with grand plans to change policies, better the nation, and ultimately do what they think is best for the American people. Wherever you fall on the political spectrum, a changeover in administration in the White House will likely have at least some impact on your personal finances, which can cause uncertainty or even fear for many of us.
Just as when you approach a milestone or experience a life event, a change in our country’s leadership can be a good time to reevaluate your financial plan to make sure it takes tax climate and government policies into account. Here are some potential changes to keep an eye on.
Social Security Reform
Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2020 and the system will rely on incoming interest payments to make up the deficit until 2033. (1) At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. (2) If you’ve been following this story and are confused about the 2033 date, you didn’t read that incorrectly. Previous estimates were that the trust fund would be depleted by 2035, but due to the COVID-19 pandemic and related economic struggles, the timeline has been pushed up 2 years. That’s not good news if you’re planning to retire soon.
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. (3) 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. (4) Another option that could improve funding prospects for 75 years is to raise the payroll tax 1.2% for everyone—that includes both employees and employers.
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. (5)
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. (6)
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.
What Does This Mean For You?
You might be scratching your head, wondering how all these figures and complicated jargon impact your retirement. Bottom line: if you have not recently reviewed your financial plan, now is the time to reevaluate and make sure your strategy is aligned with the potential tax law changes that we may be seeing over the next several years so you can maximize your wealth and minimize your tax liability. Boston Metro Advisor is here to help. Contact us for a complimentary consultation by calling (781) 995-0253 or email me directly at [email protected] to discuss the big picture and set your finances up to succeed no matter what happens.
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Paul McNulty and LPL Financial do not provide tax and/or legal advice or services.
Please consult your tax and/or legal adviser regarding your specific situation.