*This article is in no way an endorsement for any presidential, congressional or local political candidate. It is being provided solely for informational purposes and based on presidential administration campaign material available at the time of publication.
Welcome back to my latest law blog series discussing the ways a Democratic Sweep in 2020 will bring major changes to tax laws in the United States and how you can adapt your family’s estate planning considerations accordingly.
Last week, in Part 1, I talked about Democratic party nominee Joe 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. Specifically, I outlined the former Vice President’s proposals to increase the top personal income tax rate and capital-gains 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 have not read that part yet, do so now.
Here, in Part 2, I will cover three additional ways the Biden administration plans to raise taxes, along with offering financial and estate planning strategies to consider if the proposed tax hikes could impact you and your family.
Who will be impacted?
To be clear, Biden does not propose to raise taxes on any American earning less than $400,000 per year. Therefore, any potential income, capital gains and Social Security tax changes under a new administration are not likely to affect you. In fact, if you earn less that $400,000 per year, Biden’s proposed tax plan may actually benefit you…while you are living.
However…you may be surprised to learn that, after you pass away, your family and beneficiaries may be affected by Biden’s proposed changes to the federal gift and estate-tax exemption levels. Put simply, Biden’s proposed tax plan will drastically reduce the amount of money and assets you can give away, tax-free, during your life and upon your death. When you add up your life insurance, retirement accounts, investments, property, cash and belongings – along with any potential family inheritance, raises and bonuses at work, or other future increases in money and assets – the value of your estate may be more than you thought.
Elimination of step-up in basis on inherited assets
In addition to raising the capital-gains tax rate, Biden has also proposed repealing the step-up in basis on inherited assets. 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 is 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.
Alternatively, 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.
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 would be on the hook to pay exponentially more in capital gains, compared to what you would owe with step-up in basis in effect.
At this point, it is not clear 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 will not be able to avoid paying capital gains on appreciated assets they inherit from you. However, if you have highly appreciated assets, you may want to consider your 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. 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 myself and your CPA together to discuss alternative ways to save on your taxes to offset the new cap on itemized deductions. For example, 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 would like to make a big charitable gift this year but are not yet sure which charities you would want to benefit, I have strategies that could work for you. Contact me as soon as possible to get started.
Increased taxes on businesses
If you own a business, it is likely a primary source of your family’s income. Depending on its revenue and entity structure, your business could see a tax hike in the event of a Democratic sweep in 2020.
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, I can work with you to develop strategies to reduce the sting of these tax increases.
Start strategizing now
Regardless of how you feel about Trump, the TCJA offers a number of highly valuable tax breaks that may disappear for good should a so-called “blue wave” occur in the upcoming election. 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.
There is also no reason to allow these proposed changes to be the sole influence on how you plan to vote this November 2020. There are a lot of other issues and policies to consider when deciding for whom to vote. Whether any new tax laws are implemented over the next four years or four decades, you should not be worried or panicked if you are properly advised, well-prepared and have a solid estate plan in place.
Given the time needed to analyze your options, create a plan, and finalize your transactions, waiting until the new year to get started will almost certainly be too late. While you do not need to immediately make any actual changes, I suggest you at least start strategizing now. This means contacting me 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, I can help you get the ball rolling.
We can also discuss other estate planning solutions to help preserve and shelter your assets for the benefit of your heirs, such as the use of dynasty trust planning, irreversible life insurance trusts, family foundations and offshore planning.
Schedule your appointment today, so you do not miss out on massive savings that may never come again.