No matter who you vote for on November 3rd, you may want to start considering the potential legal, financial, and tax impacts a change of leadership might have on your family’s planning. As you’ll learn here, there are a number of reasons why you may want to start strategizing now if you could be impacted, because if you wait until after the election, it could be too late. While we don’t yet know the outcome of the election, a change in leadership would have far-reaching consequences on a number of policy fronts. But in terms of financial, tax, and estate planning, it’s almost certain that we’ll see radical changes to the tax landscape that could seriously impact your planning priorities. And while it’s unlikely that a tax bill would be enacted right away, there’s always the possibility such legislation could be applied retroactively to Jan. 1, 2021.
This two-part series is aimed at outlining the major ways Biden plans to change tax laws, so you can adapt your family’s planning considerations accordingly if he is elected. In part one, we detailed 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, we discussed 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 haven’t read that part yet, do so now. Here, in part two, we’ll cover three additional ways the Biden administration plans to raise taxes, along with offering steps you might want to consider taking 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 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’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 capital gains on the $200,000 difference on the house’s value from when you inherited it and when it was sold. However, 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. And whether you sell it right away or wait for it to increase in value, you’d be on the hook to pay exponentially more in capital gains, compared to what you’d owe with step-up in basis in effect. 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 appreciated assets they inherit from you.
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 your CPA 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.
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 could see a tax hike should 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, but only for those businesses with pass-through income exceeding $400,000.
Start strategizing now
The TCJA offers a number of highly valuable tax breaks that may disappear for good. 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.
Given the time needed to analyze your options, create a plan, and finalize your transactions, waiting until the election is over to get started will almost certainly be too late. While you don’t need to immediately make any actual changes, we suggest you at least start strategizing now. 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, get the ball rolling so you don’t miss out on massive savings that may never come again.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a strategic planning session, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by contacting our office today to schedule a planning session and mention this article to find out how to get this $750 session at no charge.
Disclaimer: All information on this website is for informational purposes only and is not legal advice. You should contact an attorney trained to work with families on estate planning matters regarding your specific situation. Use of and access to this website or any of the email links contained within the site do not create an attorney-client relationship between the Law Office of Keoni Souza, LLC, and any users or any other party.