The 2020 U.S. Presidential Elections were a nail-biter, and the results were astonishing.
Some expected that, even if Biden were to win the election, Republicans could very well maintain their majority in Congress. In that case, many policies currently in place would largely remain unchanged.
As we know, the Democrats took sweeping control. We’re still waiting to see how policies and decision-making will unfold over the next several months. But right now, you’re likely wondering when tax reforms might come into effect, and how they’ll impact your estate planning.
When Will Tax Reforms Take Place?
During his inauguration speech, President Biden made it clear that beating the COVID-19 pandemic, addressing climate change, and revising immigration policies would be his top priorities. Experts believe that tax reforms may not take place until later this year.
This is good news. You know that change is likely coming, and you still have time to take action.
5 Tax Reforms In The Pipeline
Now that Democrats control both the White House and Congress, you can be sure that tax reforms are on their way. Now is the perfect time to review your estate plan and make any adjustments as necessary. Read on for the 5 tax reforms that experts believe will be enacted by the Biden administration:
1. Reduction In The Estate Tax Exemption
Currently, the lifetime estate tax exemption amount is at $11 million. That means that federal estate taxes are only assessed to assets valued over this amount. Anything under is exempt.
If Congress makes no changes, it will automatically expire at the end of 2025. After expiration, the amount will be restored to $5 million. Both of these figures are adjusted for inflation. The Biden campaign did not specify what they propose to reduce the estate tax exemption down to. However, some experts are estimating that the administration may propose a reduction down to $3.5 million.
2. Increase In The Estate Tax Rate
Estate tax is assessed on a person’s assets when they pass away. Back in 2001, the estate tax rate reached a high of 55 percent. The current tax rate was 40 percent. Based on liberal policies, one could expect the tax rate to increase sometime in the next four years. You should note that some states assess their own estate tax, in addition to the federal estate tax.
3. Reduction In The Gift Tax Exemption
Guess how much the gift tax exemption is? Currently, it’s actually the same amount as the estate tax exemption. That’s $11 million, adjusted for inflation. That means that you can currently give gifts, in your entire lifetime, totaling up to $11 million without having to pay any taxes.
One of the best ways to keep money within the family is to provide gifts while you are still alive. Currently, you are allowed to gift as much as $15,000 per person, annually.
Although there is no definite amount published yet, some believe the gift tax exemption could be reduced significantly. Some rumors have even floated $1 million as a possible number.
4. Elimination Of Step-up In Basis At Death
When you sell an asset, you have to pay taxes on any capital gains that you’ve made on it. Basically, it’s any profit you make on that asset through increased value, such as real estate appreciation.
Many individuals include highly-appreciated assets in their trust-based estate plans, with plans to pass it along to their heirs. This is because they don’t want to be subject to capital gains tax, and would rather pass the asset down within the family.
As the heir, you’re currently protected by step-up in basis at death if you were to inherit an asset. This means that the asset’s base cost is bumped up (“stepped up”) to its current fair market value. You wouldn’t be liable for the appreciation on the property’s value, and thus, you wouldn’t have to pay taxes on capital gains.
The Biden administration has proposed to eliminate step-up in basis at death. This means that heirs would be subject to capital gains tax. If you have assets that you’ve been holding on to as a way to avoid capital gains tax, you will likely need to switch up your strategy.
5. Possible Increase in Capital Gains Tax
Biden’s proposed tax plans included an increase to the capital gains tax. To clarify, capital gains tax is assessed when you make a profit when selling an asset. How much you pay in taxes depends on two factors: how long you’ve held the assets, and your overall income.
This year, the capital gains tax rate is either nothing, 15 percent, or 20 percent, depending on your income level. If you make less than $40,000 per year, then your tax rate is zero. If you make over $40,000 but under $441,450, then your tax rate is 15 percent. Finally, your tax rate is 20 percent if you make $441,451 or more.
Note that we’re talking about long-term capital gains. If you sell an asset within one year, it counts as short-term gains. Those profits are taxed in the same brackets as your regular income. In this case, it’s best to hold on to your assets for as long as you can.
It’s Time To Evaluate Your Estate Plan
One of the main goals of estate planning is to pass down your legacy to loved ones. Further, you want to pass down your accumulated property and assets with as little taxation as possible. With many tax reforms in the pipeline under the change in administration, now is more critical of a time than ever to re-evaluate your estate plan.
Luckily, online platforms like Trust & Will will help you sort through complex issues surrounding financial and estate planning. If you haven’t already, make sure to contact your estate planning professional today to get started. There may be some effective strategies you can put into place before some of these tax reforms are enacted.