In his tax plan, President-elect Biden proposes reversing the Trump-era tax cuts that were passed under the 2017 Tax Cuts and Jobs Act. The Tax Policy Center and the Tax Foundation estimate that the federal government will collect an additional $4 trillion in revenue over the next 10 years.
Biden’s tax plan calls for an increase to pre-Trump levels for individual and corporate income tax rates, an increase in social security taxes and the capital gains taxes, as well as the reversion of the estate tax exemption and the elimination of the basis step-up on death.
A president cannot increase tax rates independently, and Biden’s ability to push through tax increases depends in large part on the outcome of the Georgia Senate seat. However, even if Republicans retain control of the Senate, tax increases are possible as both sides will seek to compromise on various issues. Congress does have the ability to increase tax rates retroactively (to the start of the new Congressional session in early January), which means that it is possible that taxes will go up starting January 2021 even if Congress does not pass a bill until much later in 2021.
We are encouraging all of our clients to take immediate action and plan for the possible tax increases.
Income tax planning is straight-forward: if tax rates are expected to be lower this year than next year, push income into 2020 and defer deductions into 2021, if you are able. This applies to both ordinary income and income from capital gain events.
Estate tax planning is going to be more complex and even more critical. Biden is calling for a reduction of the current per person estate tax exemption from $11,580,000 to $3,500,000, and for the elimination of the step-up in basis on death.
This means that more families will be subject to the 40% estate tax and many of our clients should consider completing lifetime gifts before the exemption is decreased. The IRS has publicly stated that taxpayers may complete lifetime gifts and take advantage of the $11 million gift tax exemption, and that exemption will not be clawed back if it is later decreased.
Traditionally, a lifetime gift carries a significant tax downside. Assets gifted during life (either directly to children or to an irrevocable trust) will not receive a basis step-up on death. We always had to choose between keeping an estate in the estate, paying the estate tax and receiving the basis step up, or excluding the asset from the estate, avoiding the estate tax and not receiving the step-up.
Biden’s proposed elimination of the basis step-up simplifies the planning. The loss of a basis step-up is no longer a planning consideration if Biden’s plan goes forward. The big dilemma is how do we plan now, without knowing with certainty whether basis step-up will remain or go, and whether the exemption will remain high or will be decreased to $3.5 million?
Fortunately, we have a solution that we have used for many clients over the years. Our approach to lifetime gifting allows our clients significantly more time to decide whether a gift took place currently. To make this possible, many clients will need to implement a basic planning structure that will allow us to make the decision not in December of 2020, but perhaps as late as September 2021.
If your estate may be taxable under Biden’s proposal, do not wait. You must take action before the end of this year. We can allow you to plan now and decide later.
Contact Jacob today to find out more.
