The Taxman Cometh

James McGlynn

LATE LAST YEAR, Congress voted to kill off the so-called stretch IRA, which had allowed those who inherited retirement accounts to draw them down slowly over their lifetime. Many folks were surprised by the stretch IRA’s demise, but they shouldn’t have been.

When a tax break or some other government provision benefits only a few folks, Congress often changes the law. Think back to 2015. That year, Congress eliminated the ability to “file and suspend” Social Security—another strategy that tended to be exploited only by a privileged few.

I suspect we’ll see similar Congressional action in the years ahead.

This election season, there’s been talk of reversing the tax rate reductions in 2017’s Tax Cuts and Jobs Act (TCJA), especially for those who’ve benefited the most from those cuts. In any case, after year-end 2025, many of the TCJA changes sunset. The upshot: If Congress doesn’t act in the next five years, taxes will automatically increase. But it isn’t just the TCJA that’s in the political crosshairs. Here are five other key areas where we might see changes to the tax code:

  • There’s discussion of eliminating the preferential long-term capital gains and qualified dividend tax rates for those with incomes above $1 million. Warren Buffett has often complained that he pays a lower tax rate than his secretary. This change would ease his conscience by boosting the capital gains and dividend tax rate from 20% to potentially 39.6%, but only for those with seven-figure incomes.
  • The TCJA reduced corporate tax rates from 35% to 21%. There are proposals to increase that rate to 28% and to ensure all corporations pay a 15% minimum tax.
  • I predict that, at some point between now and 2034, there’ll be changes to the payroll tax that funds Social Security or, alternatively, that other federal revenues will be used to support the program. If not, we could face a 20% cut in Social Security benefits due to a lack of funding—and the fact is, there are simply too many seniors who rely on Social Security as their main source of retirement income. In 2020, workers pay Social Security payroll tax on their first $137,700 of earnings. One proposal calls for payroll taxes also to apply to earned income above $400,000. That would leave earnings between $137,700 and $400,000 free from payroll tax—for now. As the $137,700 threshold is increased each year with inflation, eventually all earned income would be subject to payroll taxes.
  • In 2017, the federal estate tax exemption was doubled, which means those who die in 2020 can leave $11.58 million free of federal estate taxes. In 2026, the exemption is scheduled to return to $5.5 million. Will it happen? Today, if you hold assets in a taxable account with unrealized capital gains, that potential tax bill disappears when you die, thanks to the so-called step-up in cost basis. There’s talk of eliminating the step-up in cost basis—and this could be part of a tradeoff to maintain today’s higher estate tax exemption.
  • Most 401(k) contributions come from higher-income earners, who are able to take a tax deduction for the money they save. Many low-income families either don’t fund 401(k) plans or don’t earn enough to benefit much from the deduction. To help these families, some have proposed giving folks a 26% tax credit, instead of a tax deduction, for their 401(k) contributions.

Will all these changes happen? Much depends on whether a single party ends up controlling both the White House and Capitol Hill. From what I’ve read, we’re most likely to see an increase in the capital gains rate for high-income earners, an elimination of the step-up upon death and a change to the 401(k) deduction. Got large unrealized capital gains? You may need to rethink your estate plan, just as retirement account owners needed to rethink their estate plan following this year’s nixing of the stretch IRA.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Back WhenFatten That Policy and My Retirement.

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