The US tax landscape is changing again. Recently, President Biden proposed one of the most significant tax increases in about three decades.
That sounds threatening, but it is also an opportunity for consultants to discuss strategies for reducing taxes with clients and to learn how they can get ahead in an environment with higher taxes.
"According to Bloomberg, to the extent that the Biden Plan focuses on individual income taxes, it targets the 'rich'," notes Nationwide's Doug Ewing. “Consistent with its election promises, the Biden Plan would impose income taxes on those earning more than $ 400,000 and capital gains taxes on those earning $ 1,000,000 annually. So what about people on lower incomes? This begs an interesting question: will the new tax legislation retain some aspects of the 2017 tax law changes made during the Trump administration? "
The time for advisors to strategize with clients on that front has now come as the Biden administration likely knows they need to score major legislative victories before the 2022 mid-term elections. As it stands today, Democrats enjoy a small majority in both Houses of Congress, and some political experts believe that it is possible that the majority of the House could evaporate in the medium term in 2022.
Retirees should pay particular attention to tax changes, partly due to possible changes to the standard deduction method in the Tax Reduction and Employment Act (TCJA) passed under previous administration.
“The standard deduction is especially important for retirees who typically don't have a similar amount of individual deductions,” added Ewing. "In fact, it is estimated that approximately 90% of taxpayers will choose the 2020 Standard Withholding. The importance of the Standard Withdrawal for retirees is that it fully offsets an equivalent amount of withdrawals from tax-deferred retirement accounts." In practice, for a 65-year-old married couple, the first $ 27,800 that is withdrawn from a tax-deferred retirement account is generally tax-free. If the standard deduction is reduced, more retirement income would be taxable. "
The White House proposal also has a significant impact on capital gains, but the silver lining is that the pitch doesn't apply to many clients. We are not yet aware of any further noticeable effects on customers who earn less than $ 400,000 and $ 1,000,000 per year.
For more information on income strategies, see our Retirement income channel.