A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes President Biden’s administration will usher in, two possibilities are that it will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs.
In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be more than halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals.
Another possible tax change is with respect to how the “cost basis” of property is determined when it is passed on at death. When determining whether a capital gains tax is owed on property, the cost basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay capital gains taxes on the $40,000 increase in value.
Under current law, when a property owner dies, the cost basis of the property is “stepped up” to the date of death value. This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.
According to an article in the New York Times, the current administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value.
Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year.
Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment. If you are concerned about how these potential rule changes could affect your estate, talk to your attorney to determine what planning may be advisable now.
*This article is provided for persons interested in elder law issues in Virginia and across the United States. This article has been written by a practitioner in the field of elder law, but unless otherwise noted, the writer is not affiliated with ThompsonMcMullan, P.C. Nothing in the newsletter or the articles is, or is intended to be, legal advice or a substitute for legal advice. If you need legal advice of any kind, please consult an attorney with experience in that area of the law, whether in our firm, or otherwise.