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4 Biden Tax Proposals That Could Shake Clients' Retirement, Estate Plans

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In his first four months in office, President Joe Biden has already made some significant economic changes — including signing an extensive COVID-19 relief bill.

As the Biden-Harris administration continues to execute the plans outlined during their presidential campaign, many in the financial services industry are preparing for tax changes. Several of the suggested proposals in Biden’s tax plan could significantly affect retirees and change how financial advisors build efficient retirement income plans.

Advisors can prepare for the changes ahead by taking advantage of the current historically low tax ratesClients who are in a low tax bracket could consider converting funds from a traditional retirement account into a Roth IRA as a tax-saving option.

Another option is harvesting capital gains, not just capital losses. If it’s unlikely that a zero or a 15% tax bracket will be available later on in retirement, it might be helpful to harvest some capital gains and take advantage of the low tax bracket.

Another way to prepare is by stress-testing for tax changes, the same way you might stress-test for a down market. How would raising the tax rates impact your client’s retirement strategy?

If capital gains and qualified dividends are no longer afforded preferred tax treatment, is your client’s plan affected? What happens if the estate exemption is lowered? Consider adding a stress test for these possible futures into your planning.

Here are a few changes you need to prepare for:

1. Rising tax rates. 

Currently, the top tax rate is 37%. President Biden has proposed adjusting the rate back to 39.6%, which was the top tax rate prior to the 2018 Tax Cuts and Jobs Act.

While there will be pressure on both sides to bring down some of the other tax brackets or adjust the threshold, advisors need to be aware that taxes are unlikely to decrease for lower-affluent or affluent taxpayers — and plan accordingly.

2. Adjusting the estate tax exemption.

Over the past several years, the estate tax exemption has varied. Currently, you can have $11.7 million in an estate before facing any estate taxation.

Biden’s tax plan proposes reducing the exemption to $3.5 million, which means the number of people paying estate taxes will increase significantly. Gifting earlier on in retirement or using life insurance as an estate planning tool could be good planning options for some.

3. Additional taxation to pay for Social Security. 

FICA taxes are used to fund the Social Security system. Workers pay taxes on up to $142,800 of income, which is indexed yearly for inflation.

An employee pays 6.2%, and the employer pays another 6.2% for a total of 12.4% under the current system. If the new proposal is adopted, the tax would be reinstated for people who earn more than $400,000 a year. High earners would again begin paying 6.2%, and self-employed people would pay both halves, for a total of 12.4% on annual income over $400,000. 

4. Eliminating the ‘step-up in basis at death’ provision.

Currently, those who inherit portfolios pay very little in capital gains tax. They pay tax only on the difference between the date of death value and the value on the day they sell the assets, thanks to the “step-up in basis at death” provision.

Biden has proposed eliminating this provision, which could result in one of two possibilities: carryover basis or immediate taxation of capital gains on death. Under the carryover basis possibility, the inheritor would retain the original purchase price as their new basis.

They wouldn’t be taxed until they actually sold the asset, but they wouldn’t get the “step-up in basis” that would allow them to sell the asset with very low taxation. Under the immediate taxation on death possibility, the estate could be charged the capital gain, in which case estates would require cash to settle taxes or be forced to sell assets or investments to meet the liability. 

To plan for either possibility, advisors will want to make sure that the portfolio is aligned all the way through retirement and avoid the balancing game between holding an asset the client wouldn’t otherwise hold with the hope of avoiding tax altogether.

Ultimately, advisors will want to prepare for the variety of tax changes that could occur and take steps to ensure client plans aren’t blindsided by any of these potential changes. 


Joe Elsasser developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Joe later founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk. In January 2019, Covisum launched Income InSight, an income planning tool.

Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors.