Contributed by: Christina Hester Snyder, Associate Partner and Wealth Advisor, Jacob William Advisory
Published by Mark Ring, Managing Partner, Founding Partner and Wealth Advisor
Changes come with every new administration. Each new president comes in with grand plans to change policies, better the nation, and ultimately do what they think is best for the American people—after all, that’s why they got elected in the first place! No matter where 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. This can create uncertainty or even fear in many of us.
If you haven’t looked at your financial plan recently, this is a great time to reassess. As with any milestone or major life event, a change in our country’s leadership necessitates a reevaluation of your financial plan to make sure it takes tax climate and government policies into account. Let’s discuss some potential changes to watch out for.
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. At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. 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. 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. 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.
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.
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 This Means For You
It’s complicated, we know. What it boils down to is, in order to maximize your wealth and minimize your tax liability, now is the time to reevaluate and make sure your financial plan is aligned with the potential tax law changes we may see over the next several years. Jacob William Advisory is here to discuss how these changes will affect your estate and retirement plans and how we can help mitigate their impact. Contact our office by calling 410-821-6724 or emailing firstname.lastname@example.org or schedule an appointment at https://www.jacobwilliam.com/insights/#contact. Together, let’s work toward setting up your finances to succeed no matter what.
Mark Ring is a Managing Partner, Founding Partner and Wealth Advisor at Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Mark has over 30 years of industry experience and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Mark graduated from the University of Maryland with a Bachelor of Science in Economics and spends his time outside of the office with his wife, Nancy, and his two wonderful children. He gives his time to numerous nonprofit organizations related to education and the arts, often serving as a board member. He enjoys playing tennis, golf, bicycling, cooking, and traveling. Learn more about Mark by connecting with him on LinkedIn.
About Christina Hester Snyder
Christina is an associate partner and wealth advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP™). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.
Additional resources are available here: https://bit.ly/39MK92w
Ready to speak with an advisor? Click here to request a 30 min phone call!