As our country transitions to a new administration, many legislative changes are likely. The Democrats will have control of both the House and Senate for at least the next two years, giving a boost to the administration’s chances of getting its tax agenda passed. Though not official yet, below are a couple tax policies the administration might introduce to Congress:
Reducing the Federal Estate Tax Exemption
In 2021, each individual has a $11.7 million dollar lifetime exemption, meaning an individual can gift that amount during their lifetime or transfer up to that amount to beneficiaries at death without incurring gift tax or federal estate tax. The $11 million dollar exemption – an increase from the previous $5 million dollar exemption – went into effect via the 2017 Tax Cuts and Jobs Act and is adjusted each year for inflation. The $11 million dollar exemption will continue to increase with inflation annually until it expires in 2026, at which time the lifetime exemption would revert to $5 million. Many believe the Biden administration will push to reduce the exemption in the near future to a number below $5 million.
Increasing Capital Gains Tax
When you inherit assets, such as real property or stocks, that have appreciated in value since the date of purchase by the deceased owner, you receive what is called a stepped-up basis to fair market value for capital gains tax purposes. Any growth that occurred from the decedent’s date of purchase to date of death is not taxed to the inheritor. For example, if you inherit a house that was originally purchased by the decedent for $150,000.00 and is now worth $350,000.00 at the decedent’s death, then you currently do not have to pay a capital gains tax on the $200,000.00 gain in value. The Biden administration is seeking to eliminate the step-up in basis, which means that any growth during the lifetime of a decedent would be taxed to the inheritor.
If you are considering gifting assets during your lifetime, now would be a good time given the likely future changes to the tax code. If these potential tax changes concern you, please contact us so that we can review.
