There is no question – the results of the upcoming 2020 presidential elections will be a roller coaster ride as the votes are counted. Regardless of what side of the political spectrum you are on, November 3, 2020 will be a day to remember. As estate planning attorneys, we also know that these presidential and congressional elections will have far-reaching implications, particularly for your taxes.
Today’s tax laws will likely not last forever. We offer you 3 key points that every taxpayer should be aware of as the election results role in. This will provide a better understanding of the far-reaching impact that this election will have…. regardless of what tax bracket you find yourself in (oh and those may change too.)
Overall changes to Tax Laws:
The sweeping 2017 tax reform legislation, known as the Tax Cuts and Jobs Act (TCJA), combined with the Coronavirus stimulus spending makes it likely that tax policy will be near the top of the legislative agenda. Democratic Nominee Joe Biden has called for tax increases for corporations and wealthy families, while President Donald Trump supports the extension of tax cuts beyond the current scheduled sunset date of Jan. 1, 2026, when many of the individual tax cuts are set to expire.
Under our current laws, the lifetime estate exclusion amount is $11,580,000 per taxpayer, or $23,160,000 for a married couple. Meaning that after someone dies, if their estate is in excess of the exclusion amounts, their family can expect to be taxed at 40% of anything above the exclusion amount. If President Trump is re-elected, the current estate exemption is set to expire at the end of 2025, at which point the exemption amounts will be reduced to $5,000,000, or $10,000,000 for a married couple, indexed for inflation. Trump favors making the current doubled exemption amount permanent, while Biden proposes a decrease in the exemption amount to “historical norms.” While Biden hasn’t indicated his proposal of any specific amount, it is likely that this would mean at least a reduction to the pre-TCJA amount, which is about half of the current exemption, and potentially a decrease to an exemption of $3,500,000. (Which was the 2009 exemption amount under the Bush tax cuts and has been proposed by Democrats in recent years.)
Here’s how stepped-up basis works. Mom bought her home in the year 2000 and lived in it ever since. Mom passes away in 2020 and leaves her home to her children. This home has been appreciating in value for 20 years. Yet when mom died and this asset passes to her heirs, this home rises to the market value as of her date of death. Her children then inherit the home and receive this “stepped-up basis.” If the children choose to immediately sell the home, they can do this and expect to pay minimal to no income tax on the capital gains. Note that an elimination of stepped-up basis will result in increased capital gains taxes for those that inherit the assets. Trump will keep the concept of stepped-up basis in place, whereas Biden has proposed to repeal stepped-up basis adjustments for assets that appreciated upon the taxpayer’s death. This could mean that certain assets in someone’s estate will realize any capital gains on the decedent’s passing, making the capital gains tax due immediately.
The new Congress will not take office until January 2021, but if new tax legislation is enacted within the first several months after inauguration, there is the possibility that new laws may be retroactive to Jan. 1, 2021. Alternately, regardless of who is the new President, the further we drift into 2021, the more likely it becomes that we would not see any new tax legislation until 2022.
While we do not have a crystal ball into the election, we do know the laws will be in place for at least the remainder of 2020. The estate exemption tax still affects relatively few taxpayers, but if you are among that group…it matters. Even families whose estates currently are below exemption amount may find themselves with taxable estates in the next year or two. All this means that everyone with estates that come close to the estate exemption, (or even half of it) should revisit their estate plans to make sure everything will still function as intended.
After the results of the election are in, contact our law firm at (954) 251-0332 or firstname.lastname@example.org a free phone consultation to better understand the effects of the inheritance laws and the effect on taxation. OC Estate & Elder Law has attorneys that speak English, Spanish, and Russian.