The Biden American Families Plan envisions a dystopia for upper-income taxpayers. But what are the odds it will be enacted? The election was decided by the narrowest of margins, and the bill will receive no support from Republicans. Vice President Kamala Harris will need to cast the deciding vote in a 50-50 Senate. The need to herd 50 Democrats should moderate the tax measures that President Biden has proposed.
How will this play out? Fortunately, today’s sophisticated financial professionals have state-of-the-art prediction tools on their desks that let them peer into the future. Join me in consulting the Magic 8-Ball.
Will the tax bill be passed with enough time for us to respond before it takes effect Jan. 1?
“Ask again later.” Congress will pass the bill between Oct. 1 (under budget “reconciliation”) and the end of the year. The party in power always claims to be seeking support from across the aisle, but by the end of the year they can do what they were planning anyway and claim the opposition refused to cooperate.
Will my income-tax rates go up?
“It is decidedly so.” Starting in 2022 the top marginal rate would rise from 37% to 39.6%. But the biggest tax increase will come from lowering the income level at which the top bracket applies: to $509,300 for married couples filing jointly, down from $628,300. This reneges on Mr. Biden’s promise not to raise taxes on anyone earning less than $400,000. If you’re married and make $109,302, you could still land in the highest bracket if your spouse earns $399,990.
Will the deduction for state and local taxes be restored?
“Yes—definitely.” Democratic senators from the high-tax coastal blue states have constituents unhappy with the Trump tax law’s $10,000 cap on such deductions. These lawmakers need to bring home a win. They won’t vote for any tax plan that doesn’t repeal it.
But wait—won’t our itemized deductions be capped?
“Signs point to yes.” Since repealing SALT is a valentine to the 1%, adding some limit is likely. Mr. Biden has proposed a 28% cap on the tax benefit from itemized deductions. This new cap would squeeze charities by making charitable deductions worth far less.
The president has also proposed eliminating the deduction for 401(k) contributions and replacing it with a tax credit. That would transport our customary retirement-plan strategies into the upside-down world. To avoid this income redistribution scheme, earners in the 20% brackets and above would have to avoid contributing to a traditional 401(k), while earners below the 20% brackets would have to avoid the Roth 401(k) to grab the credit instead. As certified public accountant Jeff Levine points out, your contribution could end up being taxed twice at the state level: once when deposited, and again when withdrawn.
After herding us into these plans for decades, Congress wants to change the rules to confiscate more of our savings—moving the goal posts exactly as the baby boomers head into retirement. Retirement plans are governed by a set of rules so convoluted they could be sold to Parker Brothers for a board game, yet are coupled with fines of up to half of the money for trivial infractions. This reckless rejiggering of the tax code shows contempt for the American worker.
Are capital-gains tax rates going up?
“You may rely on it.”
Will the higher capital-gains taxes be retroactive to April 2021 as Mr. Biden has proposed?
“My sources say no.” The president’s quest to raise the highest capital-gains rate to 43.4% (after the net investment income tax piles on) feels like an overreach. No one has succeeded in taxing capital gains at ordinary-income rates going back to 1923, for good policy reasons. Expect a less drastic increase, perhaps to 25% or 28%. Fans of the 3.8% net investment income tax will be pleased to see it apply to owners of pass-through businesses with more than $400,000 of adjusted gross income.
Carried interest—essentially capital gains by another name—has never been taxed as ordinary income, and this dates to 1949. Politicians rant about the superrich hedge-fund and private-equity managers, but oddly never vote to raise their taxes. When I asked the Magic 8-Ball in confidence whether this Biden chestnut would pass, it told me, “Don’t count on it.”
Will the capital gains reset to fair market value at death—known as the “step-up basis”—be eliminated?
“My reply is no.” This is a daring call on the part of the Magic 8-Ball. Perhaps it thinks that some Democratic senators will balk. While this proposal ostensibly targets the rich, it would hurt upper-middle-class families far more when they face a once-in-a-lifetime home sale or forced family business liquidation. As widows and children watch the Brink’s trucks bearing their hopes and dreams drive off to Washington, their stories would get a lot of attention, and supporters of this provision wouldn’t look like good guys. Easier to kick this one down the road.
But our estate taxes will go up, right?
“It is certain.” Even if Congress leaves the tax at its current 40% level, estate taxes will go up because the new tax plan would dramatically lower the present $11.7 million estate tax exemption. The Magic 8-Ball expects the new exemption to be set at $3.5 million a person or maybe even $5 million, revising the figure up from Mr. Biden’s proposed $1 million.
Worst of all, this much-lower exemption could take effect the day the tax bill passes, or even before. The trick here, as everywhere, is raising taxes without appearing to raise taxes. The secret is to lower the income level at which they bite so more money gets taxed at higher rates.
According to a recent report to Congress, the Internal Revenue Service has a backlog of 35 million unprocessed tax returns, up from seven million a couple of years ago. Customer-service calls (such as from your accountant) are up 300%, but only a small percentage of these ever reach an IRS agent, because hold times can be more than three hours. Will the bigger budget suffice to cope with all the new provisions of the Biden tax plan? “Outlook not so good.”
Mr. DeMuth is author of “The Overtaxed Investor: Slash Your Tax Bill and Be a Tax Alpha Dog.”
Journal Editorial Report: Rising prices are a political threat to the Biden presidency. Image: Liu Jie/Xinhua via Zuma Press The Wall Street Journal Interactive Edition
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