April 12, 2021
How U.S. President Biden’s Tax Plan Affects You
With any new presidency comes change, no matter which side of the aisle you sit on. U.S. President Joe Biden plans to raise taxes by nearly $3.5 trillion during the next 10 years on corporations and individuals who earn more than $400,000 annually, which may affect your financial status. Here is what dentists need to know.
Top marginal tax rate
The tax changes will raise the top marginal tax rate on incomes above $400,000 from 37% to 39.6%, placing a premium on keeping your income below $400,000 through deferring income, increasing deductions, and shifting income.
Tax rate on capital gains and dividends
The tax rate on capital gains and dividends will increase from a maximum of 20% now to 39.6%, on top of the 3.8% Affordable Care Act tax, to the extent your taxable income exceeds $1 million. This will have the greatest effect when you plan to sell your practice, but the impact can be minimized by closing the sale before January 1, 2022, to pull from stock losses and other investments that have declined in value to use an installment of the sale to keep your taxable income below $1 million.
Payroll taxes will increase by imposing the 12.4% Social Security tax (6.2% on both the employer and employee) on all earned income above $400,000 annually, resulting in some dentists paying a marginal tax rate of 60% or higher after considering state income taxes. Operating as an S corporation and withdrawing no more than $400,000 as salary with your remaining practice profits taken as a dividend distribution free of payroll taxes can help avoid this.
Tax benefit from itemized deductions
At the current tax rate, dentists are entitled to deduct the standard amount ($12,400 if single, $24,800 if married) or the sum of your itemized deductions (mortgage interest, state and local income and property taxes, charitable contributions, and medical expenses). Biden’s plan would reduce your total itemized deductions by 3% for every dollar that your income exceeds $400,000 and place a cap on the tax savings from itemized deductions at a 28% tax rate. Putting charitable contributions in alternate years into buckets and using the standard deduction in the other years can maximize your income tax savings.
Tax savings from 401(k) salary deferrals
By replacing the tax deduction with a tax credit, about 26% of the deferral amount, the proposed changes will reduce tax savings from 401(k) salary deferrals, increasing the tax savings for those below that tax bracket and reducing it for those in higher tax brackets.
Section 199A 20% deduction
The proposed tax changes would also repeal the Section 199A 20% deduction for dental practice and real estate profits if taxable income exceeds $400,000.
Real estate tax exemption
The real estate tax exemption will be cut from $11,580,000 to $5 million, as well as increase the estate tax rate on amounts left to your children from 40% to 45%, leaving ample time to take advantage of your annual gift tax exclusions ($15,000 per donee), split gift election, and valuation discounts.
Stepped-up basis at death
Under current law, children can inherit assets with a “stepped-up basis” equal to their fair market value at a dentist’s date of death. So while the value of your assets may be subject to an estate tax, any pre-death appreciation in the assets, such as stocks and real estate, will not be subject to income taxes when your children later sell them, creating a taxable event with all appreciation in your stocks and real estate being immediately taxed.
Contact the experts at Professional Transition Strategies for more guidance on how to navigate financial matters.