In Part I of our series about the possible tax changes that will come in with a new President Biden administration, we covered some of the headline tax policy changes promised by President-elect Biden, such as the tax increase on individuals with a taxable income that is $400,000 or greater. We also looked, in detail, at Mr. Biden’s proposal to reduce the estate and gift tax exemption, which could result in significant tax consequences for gifts that, under current tax law, would incur zero taxes.
In this Part 2, we are going to take a look at two other Biden tax proposals that could also result in significant tax changes for your estate plan or may require you to do some additional estate planning now in order to minimize your tax liability. Those two proposals are:
1. Increasing the tax rate on long-term capital gains for high earners, and
2. Eliminating “basis step-up” on inherited property.
If, after reading this article, you have questions for an experienced tax and estate lawyer on any tax policy changes discussed here – or any tax policy changes at all – then we welcome you to contact the tax professionals at Doane & Doane, PA. Call today at 561-656-0200 or fill out our online contact form.
Increasing Taxes on Long-Term Capital Gains for High Earners
Given that the 2017 law, called the Tax Cut and Jobs Act in 2017 (TCJA), resulted in significant tax savings to corporations and wealthy individuals, President-elect Biden campaigned on a number of tax proposals that were targeted towards high-income taxpayers and were meant to equalize tax benefits across all tax brackets.
One way to make the tax treatment of wage-earners and wealthy investors similar is the proposal to have taxpayers who make $1 million or more pay the same tax rate on investment income as well as wages.
Currently, the tax rate on long-term capital gains, and qualified dividends, is 20%, while the tax rate on wages for those in the highest tax bracket is 37%. President-elect Biden seeks to raise the rate on wages back to where it was in 2009 at 39.6%, and also increase the top tax rate on long-term capital gains to the same 39.6% — only for those who have income above $1 million.
So, for example, let us assume that you are someone with income over $1 million per year. You own stock in ABCD Corp., which you purchased many years ago for $15,000. Now, the value of your stock is $515,000. If you sold the stock this year, under the current tax laws, your long-term capital gains tax would be at 20%, or $100,000 (which is 20% or the $500,000 increase in value).
Under President-elect Biden’s plan, the tax on your capital gain would be 39.6% or $198,000, which is almost double the tax under current law.
Given the significance in the tax treatment of capital gains for those who make more than $1 million, it is worthwhile to consult with a seasoned tax and estate lawyer to figure out what you may want to do now, in 2020, to avoid the possibility of your capital gains taxes increasing dramatically next year.
Eliminating Basis Step-Up on Inherited Property
Under current law, the basis of inherited property is increased or “stepped-up” to the property’s fair market value on the date of the decedent’s death. The effect of that is to eliminate any capital gains (thus eliminating any tax) on the appreciation of the property prior to the decedent’s death. Mr. Biden proposes eliminating this rule.
That would mean, generally speaking, that capital gains taxes would be owed on the full appreciation (the capital gain) of the property, rather than being eliminated at death.
It is unclear whether Mr. Biden’s proposal would be to have the appreciated value taxed at the time of the decedent’s death, or at the time the decedent’s heirs sold the property. Yet, the key is that the appreciated value, currently not taxed at all, would now be subject to taxes.
For example, assume as in the last example you bought stock in ABCD Corp. for $15,000, which is currently worth $515,000. Under current law, the $500,000 does not get taxed at all at the time of your death. However, under Mr. Biden’s proposal to remove the step-up basis, the capital gains tax on that $500,000 gain would be incurred at the time of your death, or at the time your heirs who inherited the stock sold it.
In sum, if you have engaged in some sophisticated estate planning to adjust to the current tax laws, you will likely need to take some action now to determine whether you need to change your strategy to account for tax law changes that may be coming down the pike.
To do that, you want to have experienced tax and estate lawyers in your corner.
Get the Help of a Tax and Estate Lawyer at Doane & Doane Today
Founded in 2003 by husband and wife legal team, Randell C. Doane and Rebecca G. Doane, Doane & Doane provides legal and financial services to families, individuals, and businesses throughout Southeast Florida.
Estate planning is about much more than just giving away property. It is an act of love and kindness, with the ultimate goal of providing for the future financial security of your loved one. At Doane & Doane, our tax and estate professionals help people plan for retirement, make provisions for loved ones, figure out future child support, and minimize tax liability. Experienced wills and trusts attorneys know which tools to use to get the best results for their clients. Our lawyers can help you determine which tools are best suited to your specific circumstances.
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Since the day we opened our doors, we have worked hard to earn a reputation as one of the region’s most prominent tax and estate planning law firms in Palm Beach County, Florida. Our dynamic team includes the firm’s founding partners, experienced associate attorneys, and an outstanding team of paralegals, legal assistants, and support. Call the tax professionals in Naples, FL at Doane & Doane, P.A. You can reach us at 561-656-0200. Call us today.