How Will the New Administration Impact Financial Planning?

The new Administration is sure to make changes that will impact financial planning. Here are our thoughts on what's to come.

I spend a decent amount of time commuting and enjoy listening to sports talk radio. The other day on my drive into Princeton, I was listening to the Major League Baseball Network, and the hosts were playing a game they called “Rate the Rumor.” The game’s objective was for the two hosts to opine on the probability that a published rumor might be true regarding where a free agent baseball player might sign. They would rate the rumor between 1 – 10, with one being “not likely” and 10 being a virtual certainty. It was an enjoyable distraction from the commute.

Later that day, I was on a Zoom call with my peers having a scintillating discussion about the stock market and the economy. The conversation turned to the various rumors we were hearing and reading surrounding financial planning matters that the new Administration has mentioned. I reflected on my commute and thought it might be fun for us to have our own “Rate the Rumor” game. 

We did not discuss the expected increase in personal or corporate income taxes, widely speculated about and publicized. The group reviewed the various rumors on a stand-alone basis. Still, there was an overwhelming feeling that some of these items may be negotiated into other bills, such as another stimulus package.

Here are the results of our “Rate the Rumor” discussions.

Will the RMD Age Increase to 75?

Traditional retirement accounts, such as an IRA, 403(b), and 401(k), are funded with pre-tax money, and tax payments are deferred until the funds are withdrawn. Since the government wants to ensure they receive their tax money from these accounts, they implemented an age where owners must take distributions.  The Required Minimum Distribution (RMD) is taxed as ordinary income.

Before 2020, the minimum distribution age was 70 ½ years old. As part of the COVID-19 stimulus package known as the SECURE Act, the minimum age was increased to age 72. Raising the distribution age was done to provide seniors with increased retirement security. As the economy continues its slow recovery and the government debates further stimulus, rumors circulate they may once again raise the age for distribution, this time to age 75.

Most of the team sitting around the table rated this rumor a 3 (less likely to happen). The reasoning is that the government needs the tax revenue due to the stimulus spending and the deficit. I was the lone dissenting opinion, as I believe this is more likely to happen.

Will the Federal Estate Tax Exemption Decrease Before 2026?

The Federal estate tax exemption is the amount of your estate you can pass to your heirs without paying a Federal estate tax. The Federal exemption was $30,000 in 1977 and has increased every year since by inflation adjustments or revised laws. The exception was from 2002 to 2010, when it remained at $1 million. The Federal estate tax exemption is currently $11.7 million. It increases to $23.4 million if you are married. The keyword here is “currently.” The law is scheduled to sunset at the end of 2025. The exemption will then revert to $5 million (indexed for inflation) in 2026. Part of the Administration’s plan is to lower the exemption amount to $5 million before 2026, or further to $3.5 million. 

The number of people impacted by the estate tax exemption at any of these levels is minimal – below 1%. Our team rated this rumor a 7 (more likely to happen) and expects the Administration will at least lower the exemption to $5 million. This would be the first time it has ever been lowered. Some of us believe there is a possibility of it being reduced to $3.5 million.

Will They Remove the State and Local Tax (SALT) Deduction Cap?

The State and Local Tax deduction impacts those who reside in high-tax states (such as New Jersey and New York) and itemize their deductions for income tax purposes. State and local taxes include sales tax, property tax, and income tax. Before 2018, there were no limits on this deduction. Former President Donald Trump instituted a cap of $10,000 on the SALT deduction as part of the Tax Cuts and Jobs Act of 2018. The cap resulted in higher taxes for high-income filers. It mainly impacted people in the Northeast and California.

Our group hedged their bets on this topic, agreeing there will be some changes to the SALT deduction cap, but it will likely be part of a larger negotiated deal.  

Will the Administration Remove the Capital Gains Tax?

Capital gains tax is paid on the difference between an asset’s purchase price and the market value of that asset on the date of sale. The tax is due in the year of sale. If the asset was held for longer than one year, it is considered a long-term capital gain. Long-term capital gains tax is calculated at a more favorable Federal tax rate when compared to ordinary Federal income tax rates. Depending on your taxable income, the Federal tax rate on capital gains is 0%, 15%, or 20%.

Given the amount of stimulus in 2020 and 2021 and the climbing national debt, the new Administration is tasked with finding ways to increase the country’s revenues. One way to do this is by increasing the taxes paid by its citizens. Removing the favorable capital gains rate and having all gains taxed at higher ordinary income rates (ranging from 10% to 37%) would increase tax revenue to help fund the government’s stimulus spending.

Most of our group agrees that there will either be an increase in the capital gains tax rate or the threshold at which the higher rate kicks in will be lowered. The group thought this rumor is very likely to come true before the mid-term elections in 2022. 

Will the Stepped-Up Basis at Death be Removed?

A step-up in basis, which occurs in non-retirement accounts at the asset owner’s death, is the readjustment of an appreciated asset’s value for both income and estate tax purposes. If the owner sold the asset while living, they would have paid a capital gains tax on the difference between the purchase price (cost basis) and the market value on the date of the sale. This is called the realized gain and is taxable at the favorable Federal capital gains tax rate discussed above. However, if the owner passes the assets to their heirs at death, current tax law allows for the step-up from the pre-death cost to a new cost basis, which is the asset’s value at the date of death. The difference between the original pre-death cost basis and the new cost basis is not subject to income tax and simply disappears. The government loses tax revenue on the difference between the two. This has been a hotly debated topic in the past.

Our group believes unwinding the stepped-up basis is too complicated, and there are easier ways to increase taxes, such as removing the favorable capital gains tax rates. Thus, they rated the rumor as a 3, very unlikely to happen.

 In Conclusion

With a new Administration comes plenty of rumors about what will be implemented. The rumors discussed above were some of the more popular ones floating about. There are others, of course, and we will be sure to keep you informed of any new developments that might impact you and your financial plan. In the meantime, do not hesitate to contact us if you have any questions about what you are hearing.

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