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What to Know About the Tax Administration Changes

Tax policy tends to shift depending on which administration is in charge. With the current Biden administration, Democrats now have the majority in both the House and Senate, meaning the chances of new tax legislation is incredibly high.

For those with long-term financial goals and estate plans—remember, it’s not a one-and-done process—in place, new tax legislation can be problematic. While the proposed changes might not become law, our Estate Planning Specialists want to help you better understand and plan for any changes. Let’s take a closer look:

Death Could Become Taxable

Current tax laws allow our assets to grow in value over time, as long as they continue passing down for generations without being sold. Capital gains are only taxed once an heir decides to sell the assets, and the profit is based on the time they sold it, not when it was initially acquired. One proposed tax law could change this.

Under the proposed changes, an estate would be required to pay the capital-gain tax on an asset at the time of death. Generational wealth wasn’t taxed before, but this new tax would automatically trigger once someone passes away. Even if the estate wasn’t planning on selling any time soon, the asset would now become taxable as if the person had sold it before they passed.

Lowering the Estate-Tax Exemption

The current federal estate-tax exemption means very few households currently owe any estate tax. The Tax Cuts and Jobs Act (TCJA) from the Trump administration took effect in 2018 and set the maximum exemption amount at $11.7 million. Individuals with an estate valued at up to $11.7 million can leave it for their next of kin without triggering any estate tax.

The Biden administration has proposed reducing the estate-tax exemption to $3.5 million per person, which means more estates would end up paying the estate tax than before.

Increase in Capital-Gains Tax Rate

Depending on the seller’s income, long-term capital gains are currently taxed at a top rate of 20%. Under the proposed changes, for households earning more than $1 million annually, capital gains would be subject to the same tax rate as ordinary income.

Plus, the top tax rate for ordinary income—especially for small-business owners—would increase to 39.6%. That means capital gains could be taxed more frequently at almost double their current rate.

Planning for administration tax changes is always unpredictable, as none of the proposed changes are guaranteed to become law. The bottom line is you shouldn’t have to plan for these changes alone.

If you have any questions about what these estate-tax changes could mean for you and your estate plan, our experienced team of estate-planning professionals is ready to help you. Schedule your Discovery Call today!