It is not opinion, it is fact. The Biden Administration, and the Congress and Senate, are considering ways to increase taxes. What we know already is that with nearly $30 trillion in National Debt, and scheduled insolvencies for Medicare and Social Security coming in 2026 and 2034, our country's fiscal house is in an unsustainable state. If any administration has plans to spend on infrastructure, healthcare, and other big issues, there are three options: continue to plunge the U.S. deeper in debt, cut existing spending to fund new programs, or raise taxes. None of these are great options.
Here are a few of the Biden Administration's targets:
- Increasing income taxes on those earning over $400,000.
- Increasing the capital gains rate for those earning over $400,000.
- Decreasing the estate exemption for all so that inheritances become more taxable.
- Increasing business income tax rates.
These ideas may be just the beginning.
Back in December of 2019, under President Trump, the SECURE Act became law, triggering the largest overhaul of inheritance taxation in decades. Under this law, a non-spousal inherited IRA must be completely emptied in just 10 years, versus little-by-little over the longer life expectancy of the heirs. IRA distributions are taxable, and the SECURE Act will produce an enormous tax windfall for the IRS. To make matters worse, when taking these large distributions from Inherited IRAs, your heirs will likely be forced into a higher tax bracket, as a result. The solution: spend down IRAs in your lifetime, and leave heirs tax-free life insurance or Roth IRAs.
To make inheritances more accessible to taxation, legislators can also reduce the current estate tax exemption to $5 million or less. The excess of this amount will be taxed at 40% or more. Currently, a married couple can pass on over $23 million to heirs without any Federal Estate tax. Taxing the assets you leave to your heirs avoids taxing you, but the impact on your heirs and your legacy could be significant, if not severe. The solution: consider trusts that can protect your estate from taxation.
The solutions are simple and easy, and only require a plan of action. Converting IRAs to Roth IRAs while taxes are on sale can be a win-win. Roth Conversions can be beneficial to you in retirement by providing income free from taxes, while providing you with an income tax-free investment to pass to your heirs. Potentially funding life insurance with IRA RMDs can reduce taxable IRA assets and turn them into non-income-taxable insurance proceeds. The IRS has given you the tools. Take the opportunity to help yourself and your heirs by using them.