Tax Talks: Tips To Biden-Proof Your Taxes

Now the presidential race really starts. The Democrats nominated Joe Biden last week and the GOP re-nominates President Donald Trump. It would be useful to look at what the future could be, financially under each man. Presidents have the power to change the tax code -- with the caveat that Congress has a lot to say about what the administration proposes. 

It’s a 50-50 tossup whether the Democrats get both the Senate and White House. If they do, taxes will be higher for wealthy people.

In last night's Tax Talks of Freedom Family Office, we got the assessment on Biden’s Tax Plan with two experts Noah Rosenfarb (CPA and Tax Guru) and Peter Culver (Wealth and Investment Strategist). 

Watch the FULL video here: 

Here are the highlights of the Tax Advice: 

Peter: The simple message in a purely economic sense, richer people are going to pay more taxes. Just quick little statistics there is that people who are in the top 1% of income owners -- their taxes could go up 17%.  

Maybe more significantly, the statistic is that 93% of all the tax increase would be borne by only 20% of Americans. Those would be your higher earners, people with more property and who own more investments. Now is the time to think about this. If you wait until November 3rd, you may not have enough time to think through and implement all the changes that you want to make. Tax for a more wealthy person is complicated. We’re going to give you a high-level introduction to the framework -- but you should do this in more detail with your own situation. Maybe reach out to your own CPA or if we can be of help to you, reach out to us. 

Noah: (On Income tax changes) There are three different significant changes. Two of them might impact people in a slight way and that is the top tax bracket which used to be 39.6%. Now, 37% is scheduled to go back up to 39.6% if Biden’s proposal is approved. That 2.6% may not sound like a big number, but then again for a million-dollar earner that’s another $26K --, it’s significant. The other increase that could affect high-income earners is a cap on itemized deductions. So, if you remember in the last round of tax adjustments -- Local tax deductions were limited to $10K, now on top of that cap, there’s going to be caps to eliminate itemized deductions for charitable contributions or other itemized deductions. You have to be certain if you’re in a high itemized deduction category that you're evaluating or whether you’re not trying to make your charitable gifts this year versus waiting until next year. The biggest change that people should be thinking about and planning around today is the change in the proposed capital gains taxes.

Right now, the capital gains tax and dividend income tax are very different from the ordinary income tax rate. Currently, the highest ordinary income tax rate is 37% and Biden is proposing to increase it at 39.6%. Our current highest capital gains tax and dividend tax rate is 20% and Biden is proposing to eliminate the reduced tax rate and make it the same as ordinary income taxes. So, if you’re planning to sell your business in 2020  and you’re going to realize a $10M gain and paid a $2M capital gains tax, under Biden’s proposal of $2M, you’ll pay $3.96M -- almost double the amount of tax on that capital gain. 

How can I Biden-Proof my Taxes? 

Peter: Get your Wealth Manager or your CPA to look for your portfolio -- and pinpoint where are the gains and losses. You need to have a game plan. 

Noah: Complete your Gift Tax Exemption in 2020. Now is the time to finalize that decision, because if you make that decision today, the government’s willing to let you pass. If you wait until next year, that limit will go down significantly -- and that opportunity will be gone. If you wait until 2021 and have completed your Gift in 2020 -- there’s no backseat. You’re fine.   

Peter: Sometimes when we say Corporate Taxes, the listener zones out a little bit because they think we’re just talking about IBM or Netflix or Microsoft. In fact, a lot of those companies pay no taxes -- but there are a lot of business entities like LLCs, S Subchapter Corporations, C Corporations owned by individual business owners where the issue of corporate taxes is relevant and the proposed changes are significant. 

Noah: This applies predominantly to C Corporations and if we go back in history, under President Obama, C Corporations pay a 35% income tax rate. For most individuals and closely-held businesses, they did not want to be taxed under that system because after you paid your corporate tax and if you want to make a distribution to your shareholders you do that through a dividend and you're subject to the dividend tax which is 15 - 20% depending on your bracket -- It’s even more! That all changed when President Trump reduced the corporate tax rate to 21%. 

Under Biden’s proposal, he wants to raise that rate to 28% -- and wants to eliminate the dividend tax rate and all dividends will be taxed as ordinary income. Now if you own a C Corporation and you pay the 28% tax and then you issue a dividend to the US as a shareholder and you pay a 39.6% tax (that’s not even including a state tax) you probably not want to own a C corporation that’s making dividend distributions under President Biden with this plan.

We’ll want to look carefully at your corporate structure and make sure how your taxes will propose to look under the new plan and start seeing if there should be adjustments that you should be making in your corporate taxes to enable you to have the flexibility to shift income between a C and S corporation or partnership so you can take your money out of your business in the most efficient way. 

If you think your business might benefit from one-on-one interaction with Noah & Peter email our team at support@familyfreedomoffice.com.

Download a [FREE] e-book from Noah by registering HERE.