Last month, Joe Biden was sworn in as the 46th President of the United States. He and the Democratic Party have traditionally supported tax policies that would increase taxes on the wealthiest Americans. As was stated in a report co-authored by Biden in July 2020, “A guiding principle across our tax agenda is that the wealthiest Americans can shoulder more of the tax burden,” leading the president to focus on “bringing an end to expensive and unproductive tax loopholes.”
With Democrats now in control of both chambers of Congress, any future tax plan by Biden will be much easier to push through, with only simple majority votes needed to pass far-reaching legislation. Such a tax act may take on heightened priority in order to reduce the vast federal budget, especially in light of the substantial expenses associated with recent coronavirus relief legislation.
While none of us can predict if, or when, Biden’s tax plan will be introduced in Congress, it is important to be aware of some provisions that might be included in such a bill that could affect you in the near future.
More estate tax
The estate tax is imposed on property you own as of your date of death. Currently, the amount that is exempt from estate tax sits at $11.7 million per person. Biden’s plan would be to repeal the continued increases in this exemption amount that were authorized by the Tax Cuts and Jobs Act of 2017 and return to previous levels of $5.85 million or potentially even lower thresholds. This would substantially increase the number of taxpayers subject to estate taxation at death. Biden also has indicated an intent to increase the top rate for the estate tax to 45% from 40%.
While most income tax rates would remain the same under Biden’s plan, there could be an increase in the top tax rate to 39.6% from 37%. While it is not clear at what income level this rate would apply, Biden has often indicated that only taxpayers with annual incomes over $400,000 would see a tax increase. Another proposal would place a cap on itemized deductions for those earning above $400,000, further increasing the amount subject to income tax each year.
Currently, capital gains and dividends received by individuals are taxed at rates of 0%, 15% or 20% depending on the individual’s taxable income. For 2021, the 20% rate applies to individuals earning $445,850 annually or $501,600 for married couples filing jointly. Biden has proposed taxing capital gains and dividends at the top ordinary income tax rate of 39.6% for those with annual incomes of $1 million or above. Additionally, the top rate on long-term gains, i.e. gains on assets held for more than one year, would nearly double.
The current corporate income tax rate for businesses is 21%. Biden would seek to increase this rate to 28%. Additionally, while pass-through businesses, such as partnerships, limited liability companies, S corporations and sole proprietorships, can currently take an annual deduction of up to 20% of net profits, Biden would eliminate such deductions for businesses receiving income above $400,000 each year.
Under existing law, when an asset is sold, its gain or loss for tax purposes is the difference between its value as of the sale date and its cost basis, e.g., what you paid for it. When a person dies, the cost basis of the decedent’s property is adjusted, or “stepped up,” to the fair market value of the asset as of the owner’s date of death. This has traditionally allowed those inheriting property to avoid paying sometimes substantial tax on the gains that occurred during the period in which the decedent owned the property. Biden has indicated that his tax plan could include the repeal of this step-up in basis at death, resulting in substantial tax being imposed on the sale of inherited assets.
It is impossible to know if, or when, a new tax act will be introduced that might implement some of these changes. Indeed, with the slew of other issues facing the Biden administration in the midst of a pandemic, it may be next year before any action is taken on the tax front.
However, for those who may be negatively affected by the changes outlined above, now is the time to visit with your tax or estate planning professional to discuss strategies to prepare for this potential tax overhaul.
Andy Peebles is an estate planning and business attorney with the law firm of Carnahan, Evans, Cantwell & Brown PC. He can be reached at firstname.lastname@example.org.
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