Despite some pending lawsuits from the Trump Campaign, Joe Biden is the presumed President-elect of the United States. As we look to a Biden Administration, you may have questions about how the tax code could change. Will you owe more or less in taxes? How will this affect you and your family? Especially for those with high accumulated wealth, changing estate taxes is a primary concern. We’re covering what you can expect under a Biden Administration and how to prepare.
1. The Biden Campaign proposed returning estate tax levels to “historical norms.”
Currently under the TCJA, the federal estate-tax exemption is $11,580,000 ($23,160,000 per married couple). This means that you can transfer up to this amount during life or at death to a beneficiary without incurring federal estate or gift taxes. Any amount in excess of this exemption is subject to taxes.
Although President-elect Biden has not yet clarified what “historical norms” exactly means, it could indicate a return to Obama-era tax levels. This could lead to a reduction of the estate tax exemption amount to $3,500,000 ($7,000,000 per married couple) and a reduction of the gift tax exemption amount to $1,000,000 ($2,000,000 per married couple). So any estate or gift amount in excess of the exemption amounts would be subject to estate or gift taxes.
Biden, according to the tax plan he released before the election, would raise taxes on individuals with incomes above $400,000. This would include raising individual-income, capital-gains, and payroll taxes. Biden would also raise taxes on corporations by raising the corporate income tax rate and imposing a corporate-minimum book tax. Those who earn less than $400,000 per year would not see their taxes rise.
2. Biden returning estate tax levels to “historical norms” may also indicate that the top gift and estate tax rate could rise to 45%.
Current estate-tax rates top out at 40%. But under Biden’s tax plan these levels could revert to 2009 levels at 45%. This, coupled with reducing estate and gift-tax exemptions, could mean that estates with assets exceeding the estate tax exemption level would owe more taxes. The Biden tax plan would not affect most taxpayers.
3. Biden has endorsed the removal of “Step-up in Basis.”
First, let’s figure out what “step-up in basis” means. When an asset is passed on to a beneficiary on the original owner’s death, the asset has often appreciated since the time the original owner obtained it. To avoid large capital-gains taxes, the asset receives a “stepped-up” cost basis. This cost basis is the market value of the asset at the time of the original owner’s death. Current policy taxes Capital-gain income on any amount that exceeds the cost basis. So, when an asset has a higher cost basis the capital gains taxes are much lower.
For example, Clara purchases a home in 2000 for $300,000 but then passes it on to Ben at the time of her death in 2020; the house has now appreciated to $500,000. Since the market value of the home at the time of her death is $500,000, this is the new basis of the home. Later, when Ben sells the home for $550,000, the amount he is taxed on is $50,000—the difference, or the excess, between the selling price of the home and the cost basis ($550,000 – $500,000 = $50,000). So taxes are only due on any amount that the asset appreciated over the cost basis established at the time of the original owner’s death.
Biden has indicated that he may eliminate this benefit in his tax plan. This could mean that any unrealized appreciation of the asset could be taxed at the time of the original owner’s death. Alternately, this could mean that the cost basis for an asset is what the original owner paid. To use this application in our previous example, Ben would either owe capital gains taxes on the unrealized appreciation of the home ($200,000) or Ben would owe taxes on the asset if it were sold for any amount in excess of the original price/basis, which is $300,000.
4. If you have a high-value estate, be sure to review estate-planning strategies now.
The year is winding down and it is advisable to evaluate your current estate plans. Consider how to optimize the value of your estate before year-end should the tax code change.
If you’re feeling confused about how potential changes in Federal Tax Code could impact your estate, we’re here to help! Contact us today to find out how estate planning could help you and beneficiaries of your estate.