The election and your finances
While the U.S. election focus recently has been on coronavirus, there are some important tax implications that could impact your personal finances. No matter how the vote comes out, you might have just a few weeks to implement some changes because new taxes provisions enacted under the next Congress will likely be retroactive to Jan. 1, 2021.
Let’s take a closer look:
Income taxes. Biden has repeatedly pledged to increase taxes — but only on returns showing over $400,000 in income. That certainly might affect your taxes if you are taking large required minimum distributions from your IRA while still working after age 72. And for those earning over $400,000, the value of many deductions would be capped at 28%.
The Trump tax plan is more vague, but he has called for lowering some tax brackets for the middle class, and moving some wageearners down into the 15% bracket. He has already lowered total tax rates by allowing companies to suspend collection of FICA (the withholding tax that funds Social Security) and promising to make that tax cut permanent. Of course, that leaves the future of the Social Security Trust Fund in limbo.
Capital gains taxes. These taxes on assets sold after being held more than a year currently bear a 20% rate. President Trump has promised to reduce them to 15% and index those rates for inflation. Under the Biden plan, capital gains taxes would increase to as high as 39.9% for those who are earning more than $1 million a year. (Housing currently has a $250,000 capital gains tax exclusion for an individual, and $500,000 on a joint return.)
Estate taxes. You might think these “death taxes” impact only the very wealthy. But when you add up the value of your home, your retirement plans and even your life insurance (if you own it individually instead of in an irrevocable trust), the amounts can add up quickly. Your beneficiaries don’t pay taxes on the money you leave them.
But the estate itself may owe taxes. Currently, if your estate is over $11 million, it is exempt from federal taxes. Not long ago, that limit was only $5 million. The Biden campaign pledges to lower the level at which estate taxes apply. And don’t forget that many states have their own estate taxes that start at far lower levels.