Regardless of how you plan to vote on November 3rd, you should start considering the potential legal, financial, and tax impacts a change of leadership might have on your family’s planning. If you could be impacted, there are many reasons you should start strategizing now. If you wait until after the election, it could be too late.
Although the election outcome is impossible to predict, some polls show the Democrats leading over Donald Trump. And the Democrats could be poised to take a majority in both houses of Congress. Such a sweep by the Democrats will likely have far-reaching consequences on several policy fronts. But in terms of financial, tax, and estate planning, the Democrats are promising radical changes to the tax landscape, which could seriously impact your planning priorities. While it’s unlikely that a major tax bill would be immediately enacted, the new legislation could be applied retroactively to January 1st, 2021.
This two-part series aims to outline some ways the Democrats plan to change tax laws, so you can adapt your family’s planning considerations accordingly. Last week in part one, we detailed the Democrat plan to raise roughly $4 trillion in revenue by implementing various measures designed to increase taxes on U.S. citizens.
Specifically, we discussed Biden’s proposals to increase personal income tax rates and capital gains tax rates, reinstitute the Social Security tax on higher incomes, and reduce the federal gift and estate tax exemption. If you haven’t read that part yet, do so now.
Here, in part two, we’ll cover three additional ways Biden and Harris plan to raise taxes. And we will offer steps you might want to consider 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
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 rule, if you sell an inherited asset that has appreciated in value – such as real estate or stock – your capital gains are pegged to the asset’s value at the time you inherited it, rather than its original purchase price.
This can minimize, or even totally eliminate, any 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.
Alternatively, if you held onto the house for a few more years and then sold it for $700,000, you would only owe tax on the capital gains of $200,000, the difference on the house’s value from when you inherited it and when it was sold.
But if the Democrats repeal the step-up in basis, 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 sold it. Whether you sold it right away or waited for its value to increase, you’d be on the hook to pay exponentially more in capital gains taxes.
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 assets they inherit from you. If you have highly appreciated assets, meet with us to discuss options for reducing your loved ones’ tax bill as much as possible.
Capping the value of itemized deductions at 28%
Biden plans to bring in more tax revenue 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 us and your CPA together to discuss alternative ways to save on your taxes and offset the 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’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 likely will see a tax hike if Democrats sweep the election.
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 for most small businesses.
Does your family business stand to be affected by the Democrats’ proposed changes? We can work together with you and an experienced business lawyer we trust to develop strategies to reduce the sting of these tax increases. Call us today if you have a business and would like our support with this planning.
Start strategizing now
Donald Trump’s TCJA offers many highly valuable tax breaks that may disappear for good should a so-called “blue wave” occur in the upcoming election. To this end, 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.
Because it takes time to analyze your options, create a plan, and finalize your transactions, it will likely be too late if you wait until after the election. You don’t need to immediately make changes, but we suggest you at least start strategizing now. And this means contacting us right away.
Whether you need to lock in the enhanced gift and estate tax exemptions by transferring assets out of your estate or protect against capital-gains taxes by accelerating large transactions, 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 Ruberg Law PLLC. We don’t just draft documents; we ensure you make informed, empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Planning Session during which you will get financially organized and decide what YOU want for YOUR family. You can begin by calling our office today to schedule your Planning Session at no charge.