The Biden Tax Plan: How Could Tax Increases Affect Your Retirement and Assets?

The Biden Tax Plan: How Could Tax Increases Affect Your Retirement and Assets?

Editor’s Note: This article explores tax topics that can change quickly and are open to differing legal interpretations. This content is not and should not be understood to be any tax, accounting, or legal advice. Sources are provided below for information.

Almost as soon as Joe Biden was elected President, he announced his intention for an aggressive tax plan. Now the Biden tax proposal has been unveiled.

Among other things, it would raise taxes on the wealthy and use that money to help pay for new developments in the United States’ infrastructure, family plans, and educational system.

The American Families Tax Plan has been reshaped since its inception earlier this year, but the general thrust of higher taxes on the wealthy remains. President Biden’s tax plan proposes to generate an additional $1.5 trillion over the next ten years by raising the taxes on the top 1% of earners in America.

Pundits and commentators say that there will most likely be additional changes in this plan before Congress ratifies it to go to President Biden for approval.

What Does the Biden Tax Plan Include?

But as things stand, here is a breakdown of what is currently included in the Biden tax plan, and what it could mean for taxpayers in all brackets. A quick breakdown of the proposed tax policy includes:

  • Raising the top individual tax rate back up to 39.6%.
  • Increasing the capital gains rate to the same level for households with at least $1 million of annual income.
  • The expansion of the 3.8% Medicare tax rate to include all forms of unearned income, including royalties and passive income.
  • Abolishing the step-up in cost basis for certain types of assets that are inherited, such as stocks and real estate.
  • Reclassifying carried interest as ordinary income.
  • Abolishing like-kind 1031 exchanges for gains of more than $500,000.
  • Permanently extending the 461(I) limitation for business losses for $250,000 for single filers and $500,000 for joint filers.
  • Giving the IRS an additional $80 billion to use towards conducting audits. The Biden plan hopes to raise $700 billion over the next 10 years from additional revenue generated by these audits of taxpayers with incomes of at least $400,000.
  • Creating new information reporting requirements for various types of financial institutions, such as the inflow and outflow of money from bank and brokerage accounts.
  • Enhancement of several major tax credits, including the earned income credit, the child tax credit, the Affordable Care Act premium credit, and the child and dependent care credit.
  • The government is hoping that at least another 4 million Americans will be able to obtain health insurance from these tax breaks.

At this point, other types of tax increases, such as the reduction of the unified credit limit and capping itemized deductions at 28%, have been taken off of the table. However, this hardly means that they won’t reappear at some point in the future.

But the Biden Administration has made it clear that it’s pushing for no tax increases for taxpayers with incomes of less than $400,000 a year.

The Elimination of the Step-Up in Basis

Regarding the elimination of the step-up in basis for inherited assets, Biden’s plan is to eliminate this feature for gains in excess of $1 million for single filers. For joint filers it would be twice that amount.

This provision is vitally important to the administration because it functions as a sort of safety net for the overall tax plan. The provision precludes investors from simply holding on to their assets until death in order to escape capital gains taxes.

The Sunset Provision

The Tax Cuts and Jobs Act of 2017 (TCJA) reduced taxes for millions of Americans in several different respects. However, this legislation is slated to expire starting in 2025 if it isn’t repealed before then.

President Biden hopes to do exactly that, as his tax hike proposal shows. While it’s difficult to predict the future, the TCJA likely won’t last in its current form for that long.

According to political observers, the Biden Administration is pushing for Congress to use this tax proposal and make it law as soon as possible.

Capital Gains Taxes

One of the bigger reforms of Biden’s new tax plan is the increase of capital gains taxes for the wealthiest 1% of Americans to a maximum of 39.6%. This would be the same rate as for ordinary income.

The tax increase could effectively generate billions of dollars in tax revenue for the government. That is because this segment of the U.S. population holds the majority of its wealth.

The current maximum long-term capital gains rate is 20%. That present rate allows taxpayers to sell their securities and other assets and to pay a relatively low tax rate on their sales proceeds.

But if this proposed increase took hold, this tax rate will virtually double. Certain taxpayers would take a bigger hit when they sell their holdings, regardless of how long they have held them.

Those who own appreciated assets might want to speak with their financial and tax professionals for strategies planning for this outcome. Those strategies could possibly take advantage of the lower rate, as of now, for tax savings.

Much of what happens with the provision could ride on how soon that Congress named the date of when the legislation went into effect.

Estate Taxes

Another part of Biden’s original tax proposal is to shrink the estate tax exemption from its current level of $11.7 million to about $3.5 million. While this wouldn’t affect the vast majority of taxpayers, it could have a profound effect on the top 1% of taxpayers.

Wealthy taxpayers might turn to estate planning strategies, such as charitable giving, in order to preserve their assets for the next generation.

What You Can Do Now

If you believe (along with many Washington insiders, financial pundits, and other experts) that a tax hike is around the corner, there are several things that you can do to lower your tax bill going forward.

To be clear, this isn’t any tax planning advice. Nor is this a recommendation of any of these strategies. That being said, some of these tax planning strategies might include:

Lower Tax Liability with Roth Conversions

If you have traditional IRAs and/or qualified plan balances lying around, then this could be a time to explore converting them to a Roth IRA. That would enable you to take advantage of today’s lower tax rates.

You might look at this with your tax advisor even if it lands you in a higher tax bracket for this year. The tax savings might pay off later. You could even pay reduced taxes over your retirement lifetime than you might have without the Roth conversion (and without also possibly other tax-smart moves).

Furthermore, if you put a portion of your retirement savings in an annuity, you can get a guaranteed stream of tax-free income that will last until you die. You will continue to receive this income even if you have completely depleted your money inside the annuity.

Just be sure to consult a tax expert or financial advisor for advice on this matter before you proceed.

Reduce Countable Income via Non-Qualified Annuity Income

Unlike many other sources of retirement income, your Social Security benefits aren’t fully taxable.

Depending on how much provisional income you receive (or countable income toward how much of your benefits might be taxable), your Social Security payments can be tax-free. Or 50% to 85% of your benefits may be taxable with higher income levels.

One way to lower your provisional income is through non-qualified annuity payments. If you are interested in potentially reducing your overall tax liability, take a look at non-qualified annuities for part of your retirement savings.

When this type of annuity starts to pay out when you retire, a portion of each payment will be counted as a tax-free return of principal, at least until your principal has been exhausted.

The minus side is that you can’t take a tax deduction for the initial premium that you put into your annuity contract.

Explore Other Sources of Tax-Free Income

Apart from Roth accounts, you may be interested in other sources that can generate tax-free income for you.

Some other instruments can include using interest from municipal bonds and paying for qualifying health expenses from a health savings account (HSA). These options can generate tax-free income for you in various situations, so discuss them with your financial professional and tax advisor if you might be interested in them.

Still, another option for drawing tax-free retirement income is the cash value of a life insurance policy. The way that the life insurance policy is structured, and how you take withdrawals from the cash value, are important for being able to tap this for tax-advantaged income.

Different types of permanent life insurance can be used for creating this source of income for you. So long as the policy is set up properly, the money inside these vehicles can grow tax-deferred and can be accessed via tax-free policy loans.

It’s important to know how to access your money in these policies without creating a tax bill. Generally, taking distributions in the form of loans prevents them from being classified as taxable withdrawals.

Since the life insurance policy must be structured correctly, help from the right financial professional is crucial. Just like with any strategy or vehicle, this isn’t an effective option for everyone.

It can make a difference to speak with a financial advisor or licensed agent who is independent, understands these strategies well, and can guide you in your best interest.

Reduce Future Tax Bills with Long-Term Care Spending

According to various sources, as much as 70% of Americans ages 65 and up may require some sort of long-term care at some point in their lives. Long-term care needs can be costly. Care such as home health services or a room in a nursing home can wind up costing thousands of dollars per month.

When paying for long-term care expenses, the risk is you may spend down your assets quicker and thereby dwindle sources of income that pay for everyday living expenses. Not only that, if you are taking withdrawals from traditional IRAs or other accounts that hasn’t been taxed yet, then your tax hits can quickly add up.

The good news? Insurance companies have recognized that this is a growing risk for retirees, and they have responded with innovation in their products. Now insurance products from life insurance companies have living benefits that can help you cover the expenses that arise in such situations.

Some policies can give protection against death, critical and chronic illness, terminal illness, and disability, while providing tax-free proceeds for those risks. Your financial professional can explain more about what these options may encompass.

If you are wondering about ways to maximize your income in retirement and still finance this sort of protection, one solution might be a split annuity design. You would have guaranteed sources of payments that don’t change and last for as long as you may need them.

With a split annuity, a portion of each payment can go towards paying the policy premiums. Then the rest of the payment can be used for retirement income.

Your financial advisor or agent can help you with more information on these strategies, whether they are right for you, and in what situations they might make sense.

Make Use of Gifting Strategies During Your Lifetime

You may also consider gifting cash or other assets to heirs while you are still alive to reduce your taxable estate.

Current tax laws permit a person to gift up to $15,000 each year to whomever they like. Married couples can donate twice that amount.

This could be one way among your arsenal of tax planning strategies to draw down the value of your taxable estate before you die.

Tap into Charitable Giving Strategies

If you like giving to charity, you can donate your IRA distributions up to $100,000 to a qualified charity of your choice. This is known as a qualified charitable distribution (QCD).

If you do so, your distributions won’t be counted as taxable income. What’s more, you can donate a substantial sum towards the charity of your choice.

You can also use charitable remainder trusts or charitable lead trusts to provide you with income during retirement, but there are a number of rules that must be followed to use these strategies. Be sure to speak with your legal counsel for guidance on these options.

On top of consultation with tax experts, accounting experts, and other professionals for guidance, your financial professional can discuss these strategies with you to ensure that your tax savings are secure.

Donate Appreciated Assets to Charity

While we won’t discuss this strategy in depth here, another option is to donate appreciated assets directly to a charity. There may be capital gains tax due in certain situations. Your tax advisor can help guide you in any questions that you have about your personal circumstances.

Also, special rules may be used to determine the amount of your charitable donation that you can deduct. Your tax and financial advisors can advise you on the particulars for this type of donation.

Even if you owe the full amount for taxes now, you may face a smaller tax liability than you will if tax increases did indeed pass. Ask your tax advisor about the pros and cons of this strategy, and whether doing it early could net you some savings.

Planning for Taxes and Other Risks Affecting Your Financial Future

There is a wealth of options available to those who want to leverage tax planning strategies now before the probable upcoming tax hike. Consult your financial advisor for more information on how the Biden tax plan, and major tax increases as a major policy initiative in general, could affect you.

Should you be looking for ways to potentially lower the taxes you pay in retirement and generally enjoy a comfortable retired lifestyle, guidance from an experienced financial professional can help make a difference.

If you are looking for someone to guide you, many experienced and independent financial professionals are available at to help you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and see if a working relationship makes sense for your goals. Should you need a personal referral, please call us at 877.476.9723.


1. Grant Thornton, “Biden reshapes individual tax hike proposal” legislative update, April 29, 2021.
2. Tax Foundation, Resource Center, Tax Proposals by the Biden Administration, May 2021.
3. Tax Foundation, “The Distributional Impact of the Tax Cut and Jobs Act Over the Next Decade,” Huaqun Li and Kyle Pomerleau, June 28, 2018.
4. CNBC, “Taxes will likely rise for the wealthy regardless of Biden’s plans,” Greg Iacurci, May 19, 2021.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member