When it comes to November 3rd, it doesn’t matter who you are voting for – you still should start considering the potential financial, legal, and tax impacts a change in leadership may have on your family’s planning. As you’ll learn here, there are a number of reasons why you should start strategizing now because if you wait until after the election, it will very likely be too late.
The election outcome is impossible to predict, but some polls show Joe Biden with a healthy lead over Donald Trump and the Democrats could be poised to take a majority in both houses of Congress. Such a Democratic sweep will likely have far-reaching consequences on several policy fronts. When it comes to financial, tax, and estate planning, it is all but certain that we’ll see radical changes to the tax landscape that could seriously impact your planning priorities. There is always the possibility that when legislation does pass it could be applied retroactively to Jan. 1, 2021, so while it’s unlikely that a major tax bill would be enacted right away, you should still be aware of its ramifications.
This two-part series is outlining the major ways Biden plans to change tax laws so you can adapt your family’s planning considerations accordingly. Last week in part one, we detailed Biden’s plan to raise roughly $4 trillion in revenue by implementing a variety of measures designed to increase taxes on individuals earning more than $400,000.
The former Vice President’s proposes to increase the top personal income tax rate and capital-gain’s tax rates, reinstitute the Social Security tax on higher incomes, and reduce the federal gift and estate-tax exemption to levels in place during the Obama administration. If you haven’t read that part yet, do so now.
Here, in part two, we’ll explore three additional ways the Biden administration plans to raise taxes, as well as offering steps you might want to consider taking to offset the bite these proposed tax hikes could have on your family’s financial and estate planning.
Elimination of step-up in basis on inherited assets
Biden has also proposed repealing the step-up in basis on inherited assets, which under the current step-up in basis rule if you sell an inherited asset that has appreciated in value, such as real estate or stock, the capital gains tax you owe on the sale is pegged to the value of the asset at the time you inherited it rather than the value of the asset when it was originally purchased.
This can minimize or even totally eliminate the capital gains you would owe on the sale. For example, say your mother originally bought her house for $100,000. Over the years, the house grows in value, and it’s worth $500,000 upon her death. If you inherit the house, the step-up would put your tax basis for the house at $500,000 so if you immediately sold the house for $500,000, you would pay zero in capital-gains.
In the same scenario, if you held onto the house for a few more years and then sold it for $700,000, you would only owe capital gains on the $200,000 difference on the house’s value from when you inherited it and when it was sold.
However, if the step-up in basis is repealed and you sell the house, you would owe capital gains tax based on the difference between the home’s original purchase price of $100,000 and the price at which you sell it. Whether you sell it right away or wait for it to increase in value, you’d be required to pay exponentially more in capital gains compared to what you’d owe with step-up in basis in effect.
At this point, it isn’t clear exactly how the new rules would work under Biden’s plan or what, if any, exceptions would apply. That said, if step-up in basis is repealed, your loved ones most likely won’t be able to avoid paying capital gains on appreciated assets they inherit from you. If you have highly appreciated assets, meet with us to discuss options for reducing your loved one’s tax bill as much as possible.
Capping the value of itemized deductions at 28%
Another way Biden plans to bring in more tax revenue is by capping the value of itemized deductions at 28% for those earning more than $400,000. Spelled out, this means taxpayers in the highest bracket would get a 28%, rather than 39.6%, reduction for every deductible dollar they itemize.
Given the proposed cap, if you earn more than $400,000 and plan to itemize, you should meet with us and your CPA together to discuss alternative ways to save on your taxes to offset the new cap on itemized deductions. If you would be limited by the itemized deduction cap in 2021 or later, you may want to consider increasing charitable donations in 2020.
If you’d like to make a big charitable gift this year but aren’t yet sure which charities you would want to benefit, we have strategies that could work for you. Contact us as soon as possible to get started.
Increased taxes on businesses
If you own a business, it’s likely a primary source of your family’s income and depending on its revenue and entity structure, your business could see a tax hike.
One of the hallmarks of the TCJA was a lowering of the corporate tax rate from 35% to 21%. Biden proposes to raise the corporate rate to 28%. Additionally, under the TCJA pass-through entities—sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—were given a potential 20% deduction on Qualified Business Income (QBI). Biden plans to eliminate the 20% QBI deduction, but only for those businesses with pass-through income exceeding $400,000.
If your family business stands to be affected by these proposed changes, we can work with you to develop strategies to reduce the sting of these tax increases. Call us, as your Personal Family Lawyer®, today if you have a business and would like our support with this planning.
Start strategizing now
Whether you support Trump or not, the TCJA offers a number of highly valuable tax breaks that may disappear for good should the Democratic sweep occur in the upcoming election. Therefore, if your family has yet to take advantage of the TCJA’s favorable provisions you still have a chance to do so, but you have to act immediately.
Given the time needed to analyze your options, create a plan, and finalize your transactions, waiting until the election is over before you get started will almost certainly be too late. While you don’t need to make actual changes immediately, we suggest you at least start strategizing now, and this means contacting us, as your Personal Family Lawyer®, right away.
Whether you need to transfer assets out of your estate to lock in the enhanced gift and estate tax exemptions, accelerate large transactions to reap favorable capital-gains rates, or would like to increase your charitable donations for 2020, we can help you get the ball rolling. Schedule your appointment today, so you don’t miss out on massive savings that may never come again.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.