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Financial Planning Strategies for the Blue Wave

The financial planning implications of a Biden presidency are extremely broad. Given the expansive nature of the potential changes, I am focusing this post on addressing the  implications of a few of the more impactful tax provisions of the Biden plan. If you’re interested in a broader take on the economic implications of a Biden presidency (“Bidenomics”), see my colleague Leigh Bivings’ article here. With that said, let’s get to it!


     Key Elements of Biden’s Tax Plan & Financial Planning Implications


1. A flat percentage credit that will replace deductions for contributions to IRAs, 401(k)s, and other retirement accounts.

In other words, Biden’s proposal would eliminate the tax deduction for contributions to most pre-tax retirement accounts, and replace it with a new (potentially) 26% credit for the amount contributed. This is irrespective of the taxpayer’s marginal income tax rate, thereby equalizing the tax-deferral benefit across the income scale.

Financial Planning Implication

Taxpayers with a marginal income tax rate above 26% would be incentivized to avoid traditional retirement accounts, and instead, opt for Roth-style accounts since they would not be receiving as large of a tax benefit for their contributions. On the other hand, taxpayers below the 26% marginal income tax rate would want to do the opposite to increase the tax benefit of their retirement contributions.

Consider the following approaches to help minimize your taxes:

  • Check with your employer to see if you have access to a Roth 401(k) or Roth 403(b). If you find yourself above the 26% bracket, this might be the better option.
  • If you are below the 26% bracket and have typically opted for Roth accounts (to take advantage of your low tax bracket), you should see about switching to a traditional 401(k) or 403(b).
  • High earners who cannot make direct contributions to Roth IRAs should look into the feasibility of doing annual backdoor Roth conversions.


2. Limit the value of itemized deductions for those earning more than $400,000.

Biden’s plan would cap the tax benefit of itemized deductions to 28% of value. So, for example, an individual in the (newly restored) 39.6 percent tax bracket would see a 28-cent tax reduction for every dollar spent on charitable giving, rather than 39.6 cents without the cap. This cap on deductions would apply to all itemized deductions.

Biden’s plan would also reinstate the Pease limitation, which would reduce the value of itemized deductions by three cents for every dollar of income above $400,000.

Financial Planning Implication

Below-the-line deductions would become less valuable for those above the 28% marginal tax bracket, but these changes would have no impact for those below the 28% tax bracket under Biden’s plan.

Consider the following approaches to help minimize your taxes:

  • High earners may want to “pull deductions” into 2020 rather than taking them in future years. For example, bunch together several years’ worth of charitable donations at the end of 2020 to gain the larger deductibility.
  • Re-assess the tax benefit of home ownership (or at least a future home purchase). Owning a home (and taking deductions for mortgage interest and property taxes) will have much less of a tax benefit than it once did.


3. Increase the long-term capital gains tax rates up to the ordinary income tax rate above $1M.

To the extent that a taxpayer’s income plus capital gains exceeds $1 million, the Biden proposal calls for taxing both long-term capital gains and qualified dividends at ordinary income tax rates. This means that the top rate on capital gains would nearly double, from 23.8% today to 43.4%.[1]

What’s important to keep in mind here is that crossing over the $1M+ threshold could be the result of a large one-time sale, such as a business or property.

Financial Planning Implication

High income earners will be looking for ways to minimize large capital gains spikes in any given year (more so than before!) by shifting income between years when possible.

Consider the following approaches to help minimize your taxes:

  • Roth conversions as a means to pay taxes on income in 2020 and “lock in” lower rates.
  • Use an installment sale for your business transaction.
  • Harvest capital gains in late 2020 before the potential doubling of rates. Remember, the wash sale rule only applies to capital losses not capital gains.
  • Avoid large account liquidations (e.g., to pay for home renovations or college tuition) in a single year; instead, spread these out over multiple years.


4. Elimination of step-up in basis upon death and reduction in the estate tax exemption.

First, Biden’s plan proposes to eliminate the step-up in basis upon death, which means that inherited assets would no longer have their capital gains eliminated. It is unclear whether the capital gains would be owed immediately upon death (as though the asset had been sold) or could be carried forward until the eventual sale of the asset would force them to be realized.

Second, Biden proposes to cut the estate tax exemption amount from $11.58M (per person) to about half that amount. Estates in excess of this amount are subject to a 40% estate tax.

Financial Planning Implication

Many estates could face serious liquidity issues as they owe large capital gains taxes on illiquid investments, such as farms, family businesses, and real estate.

Consider the following approaches to help minimize your taxes:

  • A more structured approach toward selling investments during life, rather than the current wisdom of holding highly appreciated assets until death. This is especially true of anyone holding highly concentrated positions with large unrealized capital gains. It may become more appealing to diversify and de-risk your portfolio.
  • Permanent life insurance as a means to achieve estate tax liquidity and equalize your estate. Unlike the rest of your assets, the life insurance death benefit would not be includable in the recipient’s gross income and therefore not subject to income or estate tax[2].
  • Gift low basis assets to charity during life rather than continuing to hold them until death
  • Gift assets to heirs during life so the heirs can at least choose when to sell (assuming unrealized capital gains are taxed immediately upon death)


     Bottom line


At the core of Biden’s plan is a simple idea: a pledge not to raise taxes on those making less than $400,000. High income earners will need to plan carefully. Finding ways to “pull forward” income and deductions into 2020 is the macro-level strategy that most high earners should be thinking about. Perhaps the two most simple and effective approaches will be to make use of Roth IRA conversions and tax gain harvesting as ways to “lock in” current tax rates.


[1] This includes the Medicare surtax on net investment income of 3.8%

[2] There are a few exceptions to this rule that are outside the scope of this article

Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

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