How the Election Could Impact Your Taxes
Trump vs. Biden Tax Proposals: 3 Areas to Watch
Prior to a presidential election, many people begin to think about their tax situations and estate plans and wonder if a change in administration could have an impact. While President Trump has not released a formal plan, he has indicated his intent to preserve and expand on the Tax Cuts and Jobs Act of 2017 (TCJA). With the 2020 election just a few weeks away, there are three key tax proposals that could happen under a Biden presidency and Democratic gains in Congress.
1. Personal Income Tax
Former Vice President Joe Biden has announced a tax plan that would significantly change the policies and tax revisions enacted in President Trump’s TCJA. Biden’s plan would restore higher tax rates for individuals in the highest tax brackets. The rate, currently 37%, would be restored to 39.6%, where it stood before the 2017 bill. The Biden plan generally protects taxpayers with incomes less than $400,000 from tax rate increases. Trump has indicated he would implement a rate cut for middle-income taxpayers, effectively lowering the 22% marginal rate to 15%.
2. Gift Tax Exemption
During 2020, the permanent gift tax exemption stands at $11.58 million per person and is indexed for inflation each year. The TCJA made significant changes to corporate and federal tax rates and exemptions and increased the federal estate, gift and generation skipping tax (GST) exemptions from the previous amount of $5.49 million per person. The current exemption amount is scheduled to “sunset” and go back down after 2025; however, Democratic candidates have proposed reducing the exemptions to or below pre-Act levels. And this could happen as early as 2021 with a Democratic administration.
3. Estate Tax
Estate taxes are applied to an individual’s wealth at death before distribution to their heirs. Another change proposed in a Biden tax plan would repeal the present “step-up in basis” rule that increases the tax basis for inherited assets to their full market value upon death. Under current law, inherited property is taxed at a full fair-market value tax basis. This means, if the property has appreciated in value since its acquisition by the decedent, the increase in the property’s value as of the owner’s death permanently escapes capital gains tax. If the heir subsequently sells the property, the taxable gain will be limited to the increase in value over the stepped-up basis. It is important to note that repeal of the step-up basis could impact heirs of property at all income levels, not just the wealthy.
Estate Planning Before Year-End
If you think the results of the election could affect your tax and estate planning strategies, we encourage you to reach out to us for a consultation. While we do not have a crystal ball about who will win Election 2020, we are closely following how the results may affect our clients. Combined with the continued economic uncertainty caused by the coronavirus pandemic, now is a good time to consider estate planning options that are available the remainder of 2020 but may not be available in the future. It is important to remember that no matter who wins the election, with proper tax planning, most estate taxes can be reduced or eliminated.