Your Financial Plan in a Changing Political Landscape
With the Democrats winning both Senate seats in Georgia, and a new administration being sworn in next week, the landscape in Washington has certainly changed. There is much still to learn about specific policy changes, but for now, our estate planning and tax services team members wanted to offer a quick update on what we do know. Our team continues to monitor proposed legislation, and we’ll continue to offer the same counsel to you that we’ve done during other periods of uncertainty: stick to your plan, which has been built to weather all types of environments.
Here’s what is top of mind for our team right now:
- The top tax rate on ordinary income will likely head back to 39.6% when ordinary taxable income exceeds $400,000.
- The corporate tax rate, which was 35% for a generation before President Trump, was cut to 21% under the Tax Cuts and Jobs Act. This rate could be increased to around 28%.
- The limit on state and local tax deductions is likely to double from its current $10,000 to at least $20,000.
- Look for Congress to put a lower limit on what can be passed on tax-free to heirs. We anticipate the estate tax exemption amount to fall, possibly to $5-7 million, from its current level of $11.7 million.
- Look for a tax rate increase to long-term capital gains and other qualified income.
Many of these items were discussed during our September Truepoint Talks, which included a review of the Biden tax plan and the potential impact of the presidential election on financial markets.
The one big proposal that would impact high wage/self-employed taxpayers is applying the Social Security tax to earned income above $400,000. In the past, Social Security tax only applied to the Social Security wage base ($142,800 in 2021). This proposal would start this tax up again for any wages above $400,000. The odds of this happening are low because changes to Social Security taxes can’t be done through budget reconciliation and will unlikely have the 60 Senate votes needed to break a filibuster.
Additionally, some investors fear tax changes would be retroactive to January 1, 2021, but with unemployment rates still high and recovery slowed by COVID-19, we think they will more likely be delayed until January 1, 2022.
As we learn more about specific policy changes and proposed legislation, we’ll continue to share our insights with you and guide any changes in your plan. For now, rest assured that we’re following the activities in Washington to ensure your plan appropriately addresses any changes.