With a presidential election coming up next month, tax policy will be one of the issues on the table. And, while it seems reasonable to assume that if President Trump were to be re-elected his tax policy would not change, we also know that if former Vice President Joe Biden gets elected, there will be changes. Since Mr. Biden has outlined his tax plan, we are able to lay out the elements that might affect retirement plans in this brief summary. In two subsequent articles, we will take a deeper dive into issues for professional service firm retirement plans and corporate retirement plans.
- Creates a Social Security tax “donut hole” whereby wages between the wage base and $400,000 would be exempt from OASDI (12.4% split between employer and employee), but pay in excess of $400,000 would be taxed. This is intended to make up some of the current gap between Social Security inflow and outflow while not punishing what might be referred to as the upper middle class.
- Increases the top marginal individual income tax rate from its current 37% for incomes in excess of $400,000 back to the Obama-era 39.6% rate. This is a second effort to distinguish the upper middle class from the upper class.
- For income in excess of $1 million, taxes capital gains and qualified dividends at the ordinary income tax rate. Capital gains inside a qualified retirement plan or IRA are not subject to federal income taxes.
- Restores the so-called Pease limitation (limit on itemized deductions) for high earners. Qualified deferred compensation, i.e., retirement plans, generally are not a deduction subject to the Pease limitation.
- Increases the top corporate income tax rate from 21% to 28%. The higher the top corporate income tax rate, the more value deductions may have.
- Creates a new minimum tax on corporations with “book profits” in excess of $100 million. This not yet well-defined tax could decrease the value of tax deductions for qualified retirement plans.
- Increases emphasis on tax credits rather than tax deductions. 401(k) deferrals would be eligible for a tax credit – more valuable to lower earners – rather than reducing taxable income – more valuable to higher earners.
Clearly, the calculus will be different for every sponsor of qualified retirement plans. Be sure to look for upcoming articles that take a deeper dive into specifics that might affect your organization.