Biden's tax plan and what it means for your estate

2 Important Ways President Biden’s Tax Plan Can Affect Your Estate Plan

With the House and Senate in Democratic hands, President Biden’s tax plan is very likely to get through Congress. Here’s what could happen to your estate plan in the next four years.

Wednesday, January 20th, 2021, we inaugurated the 46th President of the United States, Joe Biden. That means new policies concerning COVID-19, Income Taxes, and Stimulus are coming. But there is also a possibility that President Biden could propose massive changes to the inheritance tax laws. Without a well-crafted estate plan in place, this could greatly impact your inheritance. Here are two things you need to know.

Biden's Tax Plan can affect Estate Taxes

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First is the Estate Tax.

When someone passes away, the assets they leave behind make up their Estate. When they leave those assets behind for their loved ones to inherit, the IRS imposes a specific tax on those items called an Estate Tax.  Historically, this tax has been anywhere from 55-40% of the Estate’s total value. For example, if you inherit your great aunt’s Estate worth $100,000, you would owe the IRS $40,000 and get to keep $60,000. That’s how the Estate tax works: the entire value of the Estate is taxed at a fixed percentage for those who are not exempt. Today’s exemption applies to any estate valued at 11.7 million or less. So, if someone leaves you an estate worth less than 11.7 Million (or 23.4 Million for a couple), you are exempt from the Estate tax. Not bad, right? Most people inherit less than 11 Million dollars.

However, the current 11.7M exemption is set to expire (or “sunset”) at the end of 2025 and go back to $5 Million, and several rumors are floating around that the new administration is potentially going to try to do one of several things:

1. Biden’s tax plan is likely to change the Estate Tax Exemption amount. He could do this in 2025 – or try to do it earlier.

2. Rumors have his desired amount coming in anywhere between $1M and $3M. That’s a BIG difference from 11 Million.

What does this possibly mean for you? If the exemption amount drops down to 5 million or lower, heirs will be significantly taxed by the government.

Biden's tax plan and how step up in basis can affect your estate

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Second is Step-Up In Basis.

What is a step-up?  Simply put, when someone buys something (like a house) it has a value – or purchase price, that is the cost basis that’s used to determine any gains on a property if later you try to sell it. If the house increases in value, anything you makeover the original purchase price when you sell it may be subject to something called a Capital Gains Tax.

The capital gains tax is a tax you pay on the increase (or gain) in the value of a property from the time you acquire it to the time you sell it. This also applies to real property, securities, or any asset that can appreciate in value. There are a lot of factors that come into play, but this is especially important when you leave that property to someone else upon death.

When a person leaves property to a loved one upon death under the current tax laws, the cost basis of the property receives a “step-up” in basis to its fair market value at the time of the original owner’s death. This reduces capital gains tax liability on the property by excluding any appreciation of the property that occurred during the deceased loved one’s lifetime from taxation.

It’s expected that President Biden will attempt to eliminate the step-up in basis in his proposed plan, potentially leaving heirs with big capital gains taxes.  It’s also very likely that under his administration, taxes will be increased. Biden is expected to raise the tax rates by at least 5%. While all of this is proposed and will be dependent on pending Congressional approval, the likelihood of this bill or a similar bill passing is high with far-reaching implications.  

Removing the step-up in basis means that it’s not just the wealthy whose estates will be taxed on their death. Hardworking middle and working-class Americans could also be at risk of passing down a large tax bill to their loved ones along with their assets.

No one wants to leave a legacy laced with debt! Set up a free consultation with an Estate Planning Attorney to review your situation and discuss how these changes may apply to you and what options you have to protect your loved ones.