2021 began with President Biden assuming his role in the White House office. Now Democrats control the House of Representatives as well as the Senate. Therefore, many people are anticipating changes to policies. Biden has started discussing tax changes, however, it’s still too early to anticipate what could happen. With the COVID-19 pandemic, changes to estate planning have been postponed. Regardless, you are probably wondering what tax reforms might come into effect, when they will come into effect, and how they could impact your estate planning.
6 Changes That May Or Will Occur
With Democrats controlling both the White House and Congress, tax reforms are on the way. Now would be the perfect time to review your estate plan with an attorney & make any necessary adjustments. Read on for 6 tax reforms that experts believe could be enacted by the Biden administration:
1. Reduction In The Estate Tax Exemption Level
Currently, the lifetime estate tax exemption amount is at $11.7 million. This means that federal estate taxes are only applied to assets valued over $11.7 million. Anyone with assets worth less is exempted. If Congress decides not to change it then it will automatically expire at the end of 2025. After expiration, the amount will be restored to $5 million. Both of these figures are adjusted for inflation. However, one anticipated change is that the estate tax exemption will drop to $5 million or lower in 2021, instead of waiting till 2025. This change could lead people to use various unique estate planning strategies. The good news is that the US Treasury provided directions as well as stated that they won’t apply these new taxing policies on gifts made before 2021. Normally, people decrease their federal estate assets value by transferring their assets to another account and then immediately drawing on appreciation. In other words, the plan won’t undermine relocation assets through transfer funds.
2. Increase In The Federal Estate Tax Rate
The federal estate tax is applied on a person’s assets when they pass away. In 2001, the federal estate tax rate reached a high of 55% The current tax rate is 40%. Based on liberal policies, one could expect the tax rate to increase sometime during the Biden administration. In addition, some states, like New York, assess their own estate tax on top of the federal estate tax. Read more about that below.
3. Reduction In The Gift Tax Exemption
Currently, the gift tax exemption is the same amount as the estate tax exemption which is $11.7 million, adjusted for inflation. That means that you can give gifts, during your entire lifetime, totaling up to $11.7 million without having to pay any taxes. One of the best ways to keep your assets within your family is by providing gifts while you are still alive. Currently, you are allowed to gift as much as $15,000 per person every year. Although there is no definite amount published yet, some believe the gift tax exemption could be reduced significantly. Some sources report that it could be reduced to as little as $3.5 million.
4. Elimination Of Step-up In Basis At Death AKA The Loss of Step-Up Basis
When you sell an asset, you have to pay taxes on any capital gains that you’ve made on it. Essentially, it is any profit you make from selling that asset because of its increased value, such as real estate appreciation. Many individuals put highly appreciated assets, like real estate, in their trust-based estate plans because they want to pass it down to their heirs. This is because they don’t want to be subject to capital gains tax, and would rather pass the asset down within the family.
If you are the heir, you are currently protected by step-up in basis at death if you were to inherit an asset. This means that the asset’s base cost is bumped up (“stepped up”) to its current fair market value. You would not be responsible for the appreciation of the property’s value thus you would not have to pay taxes on capital gains. But any property not protected in a trust-based estate plan may be subjected to capital gains tax which you can read more about below.
The Biden administration has proposed to eliminate step-up in basis at death which means that heirs would have to be subject to capital gains tax. If you have assets that you are protecting in order to avoid capital gains tax, you will most likely need to make changes to your estate plan.
5. Possible Increase in Capital Gains Tax
Biden’s proposed tax plans also include an increase in the capital gains tax. Again, capital gains tax is imposed when you make a profit from selling an asset. How much you pay in capital gains taxes depends on two determinants: how long you’ve held the assets, and your overall income.
The capital gains tax rates for single tax filers are 0% 15%, or 20%, depending on your income level. If you make less than $40,000 per year, then your tax rate is zero. If you make over $40,001 but under $441,450, then your tax rate is 15 percent. Finally, if you make $441,451 or more, then your tax rate is 20 percent. Here we are talking about long-term capital gains. If you sell an asset within one year, it counts as short-term gains. Those profits are taxed in the same brackets as your regular income. Therefore it may be best to hold on to your assets for as long as you can.
Given that capital gains taxes are likely to increase, the loss of step-up basis as previously mentioned would be even more impactful
6. New York’s Estate Tax
Most people are focused on potential federal changes, but each state has its own estate planning regulations too. New York assesses their own estate tax on top of the federal estate tax. While New York does not have a gift tax, the state does apply a 3-year “clawback” regulation where lifetime gifts made within three years of a person’s death are “clawed” back to the deceased individual’s estate. This was imposed to prevent wealthy New Yorkers from making gifts shortly before their deaths as a means to avoid New York estate tax. This is another specific reason why estate planning ahead and earlier is important.
New York also has an estate tax threshold of $5,930,000. Once this threshold has been surpassed, assets are subject to the state’s estate tax. In New York, taxes are applied to the entire value of the estate, not the amount exceeding the threshold. The tax rate currently ranges from 3.06% to 16% and within this rate it increases with the size of the estate. The good news is that even if a New York estate tax return must be filed, it does not necessarily mean that the estate will have to owe an estate tax. Your estate might be eligible for certain deductions that lower the value of your estate to be below $5.93 million, in which case no estate tax will be due.
Not only should people understand New York’s laws, but they also should understand that these policies could also change. New York’s laws could also change sometimes soon especially with changes in New York’s governor and the sooner these alterations can be anticipated, the better situated a person is.
When Will Tax Reforms Take Place?
As President Biden emphasized that beating the COVID-19 pandemic would be one of his top priorities, tax reforms may not take place until later on in his presidency. This is good news. We know that change is likely coming so you have time to take action.
Evaluate Your Estate Plan
One of the main goals of estate planning is to pass down your legacy to loved ones. You also want to pass down your hard-earned property and assets with as little taxation as possible. With many possible estate tax reforms in consideration, now is more critical of a time than ever to re-evaluate your estate plan. There may be some effective strategies you can put into place before some of these tax reforms are enacted.
Contact a Knowledgeable Estate Planning Attorney
Updating your estate plan is critical, especially after the introduction of new estate planning laws. If you or a loved one needs the assistance of an experienced estate planning attorney, please contact the Law Office of Inna Fershteyn at (718) 333-2394