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How might Democratic nominee Joe Biden’s tax proposals impact independent insurance agencies if they are enacted? What planning options should agency owners consider to minimize taxes?

While the details of the Biden plan are hard to find, I relied on The Tax Foundation’s “Details and Analysis of Democratic Presidential Nominee Biden’s Tax Proposals, October 2020”. The Tax Foundation describes itself as “the nation’s leading independent tax policy nonprofit”. The Foundation has been around since 1983.

Biden’s plan makes changes in numerous areas including tax rates, capital gains, tax credits, itemized deductions, corporate taxes, and estate taxes. I have tried to highlight tax changes that would be of interest to owners of local privately held agencies.

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Agents with incomes in excess of $400,000 would see a tax increase

For taxpayers with incomes in excess of $400,000 there are a number of increased taxes:

• Social Security payroll taxes of 12.4% would be imposed on wages in excess of $400,000, with one half paid by the employee, and the other half paid by the employer. If you are self-employed effectively you will pay for all of it. Currently, only the first $137,700 of wages are subject to the Social Security tax.
• The tax rate for taxable income above $400,000 increases from 37% to 39.6%. This would be on total income including wages, pass-through income from S-Corporations and LLC’s and any other taxable income.
• For those with incomes over $400,000, itemized tax deductions would be limited and capped at the value of a deduction at the 28% tax rate.
• The Qualified Business Income Deduction (QBID) would be phased out for agency owners with over $400,000 of taxable income. This could be a significant loss for insurance agency owners. The QBID provides shareholders and LLC members with a deduction equal to 20% of their pass-through income on their individual tax returns.

Capital gains tax increases could have the greatest impact on agency owners.

• Taxes on long term capital gains and qualified dividends would be taxed at the ordinary income tax rate of 39.6% on income over $1 million.
• The “step up in basis” on death for assets passing through an estate is eliminated for capital gains taxation.

These two changes along with proposed changes to expand the estate and gift tax by reducing the exemption amount to $3.5 Million from the current $11.5 Million and increasing the top estate tax rate to 45% from the current 40% could impact perpetuation plans for agency owners. The exemption is the amount of assets that can pass through an estate without taxation.

For agency owners considering the sale of their agency, in the year of sale their total income might very well exceed the $1Million threshold resulting in the doubling of the tax on at least a portion of their capital gains income to 39.6%.

The elimination of the “step up in basis” provisions would impact agency perpetuation plans that contemplated passing on ownership of the agency to the next generation through inheritance. Under current law the inheritors would receive a “step up in basis” of the agency to the fair market value as of the date of death of the previous owner.

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Things agency owners should consider if Biden wins…

If the Biden tax proposals are enacted what tax planning strategies should agency owners consider?

• Limit W-2 wages for owners and employees to $400,000 resulting in payroll tax savings.
• Limit annual taxable income to $400,000 by shifting income between tax years. This will enable the full benefit of itemized deductions and the Qualified Business Income Deduction.
• On agency sales consider the use of an installment sale plan to keep taxable income below the $1 Million annual threshold saving significant capital gains taxes.
• Evaluate your agency’s perpetuation plans and what impact the change to the “step-up in basis” rules will have on plans to transfer the agency to future generations.

Remember, the only constant is “change” especially when it comes to taxes.

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