President-elect Biden has suggested various changes in tax laws to help achieve his legislative agenda. Although 2 Senate seats in Georgia have yet to be decided which could make a difference in likelihood of success in achieving the goals of the President-elect, the following are a few of the tax changes that could occur:
- Elimination of the “step-up” in basis of appreciated investments:
In my opinion, the proposed change could affect the most individual taxpayers (or their beneficiaries or heirs). Presently, if you own stocks or real estate or other investments (other than retirement accounts) that have appreciated and you hold those assets until you die, your beneficiary does not have to pay capital gains tax on the increase. As an example, if you purchased stock for $200,000 and it was worth $500,000 at the time of your death, your beneficiary or heir doesn’t have to pay capital gains tax (presently a maximum of 20% exclusive of the net investment income tax of 3.8%) on the appreciation (i.e., 20% of $300,000) that you would have had to pay if you had sold the stock during your lifetime. The change would probably result in either the beneficiary paying the tax on the appreciation upon the death of the owner of the appreciated asset or upon the date of sale of the appreciated asset by the beneficiary. Due to the difficulty in determining an original purchase price on assets held for a lengthy period of time, it is my opinion the implementation of this proposal is unlikely.
- Capital gains tax increase and increased tax on individuals for taxpayers earning over $1 million:
Taxpayers who earn over a million dollars annually would pay the top marginal income tax rate of 37% (that could be increased to 39.6%) on capital gains instead of 20% (exclusive of the 3.8% net investment income tax) as well as on dividends. This may cause some to sell appreciated assets to lock in lower tax rates.
- Reduction in exemption that you could give at death or in life without taxation:
As of January 1, 2021, the lifetime gift and estate tax exemptions and the generation-skipping transfer tax exemption is scheduled to rise to $11,700,000 per individual (the amount increases each year with inflation). However, that the law that granted such a large exemption amount (resulting in very few paying estate taxes) is set to expire on January 1, 2026 and be reduced to the exemption amount that existed prior to the Tax Cut and Jobs Act of 2017 ($5 million as increased by inflation – so it would probably be closer to $6 million). Since Congress could act sooner than 2026, President-elect Biden has suggested a $3.5 million estate tax exemption without inflation which would result in many more being subject to estate tax. The top tax rate would be 45%. Furthermore, he has suggested that the gift and estate tax limits no longer be “unified”. Presently you can give the same amount during life that you could at death. In other words, one could give away $11 million presently without gift tax (although the donor would file a gift tax return and the amount that could be given at death without estate taxation would be reduced). President-elect Biden has suggested that the amount that could be gifted during lifetime without gift taxation be limited to $1 million. As a result, wealthy Americans are considering Spousal Lifetime Access Trusts (gift to spouse now instead of at death), gifts to certain other irrevocable trusts for children or descendants or to charities, grantor-retained annuity trusts, or making outright gifts to take advantage of the existing higher exclusion amount not subjected to gift taxation. It is also possible that the annual gift tax exclusion of $15,000 per person (without any reporting requirement) could be eliminated.
- Higher income rate for taxpayers earning $400,000 annually:
President-elect Biden has indicated he would like to increase the individual tax rate for those earning over $400,000 per year from 37% to 39.6% (which was the rate before the tax reform rates were reduced a few years ago). He has also proposed to cap the value of itemized deductions at 28% for taxpayers earning more than $400,000 annually. Also, Social Security taxes could be expanded on individuals earning more than $400,000 annually.
Of course it is uncertain what changes (if any) will occur and there are numerous other tax issues that will be on the table ranging from a first-time homebuyer tax credit to expanding tax credits for families with children to an increase in the corporate income tax rate to 28% to a refundable tax credit as a retirement savings tax incentive.
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