This month on the Illumination Wealth Blog, we want to talk about tax planning. We will be focusing on the changing estate tax laws and the overall estate and gift tax landscape, as well as estate and income tax planning for business owners. Stay tuned for a variety of articles on this topic over the next few weeks.
First, we want to look at the potential estate tax changes on the horizon for 2021. President Biden is proposing some new estate tax laws that business owners should be aware of when developing and updating their estate plans.
The Tax Cuts and Jobs Act of 2017 increased the federal gift and generation-skipping transfer (GST) tax exemption to $11,700,000. Under the original act, this increase was scheduled to “sunset’ at the end of 2025 and return the exemption back to $5,000,000 per person as it was before 2017.
President Biden has put out a proposal to change the estate tax laws and some changes could happen prior to that 2025 sunset date. Under his plan, the estate and gift tax exemptions would be lowered back to “historic norms,” along with some other noteworthy changes. Here is a breakdown of what you need to know about Biden’s estate and gift tax proposal:
Lower Exemption Amount—Biden’s proposed plan would return the exemption amounts to where they were before the TCJA. Specifically, we’re talking $5,000,000 per person or $10,000,000 for a married couple.
Elimination of Stepped-Up Basis—Under current tax law, the cost basis of assets is “stepped-up” to fair market value upon the death date of the owner. This effectively eliminates the capital gains tax on any unrealized appreciation of assets. The new proposal would eliminate this provision and unrealized capital gains would be taxed at increased rates.
Top Rate Increase—The top estate tax rate would increase to 45%. The tax on long-term capital gains and qualified dividends would also raise to 39.6% for investors with income above $1,000,000. This essentially doubles the current top rate of 20%.
Of course, these numbers might change as bills go through Congress and final details are worked out. With only a 50/50 slight majority in the Senate, Democrats will be limited by how progressive they can be with these tax changes. The Tax Cuts and Jobs Act also has specific provisions in place to keep these changes from happening too suddenly.
We’re not here to make any political statements or judgments. We just want to provide this information to help business owners and individuals make smarter financial decisions as they plan for the future. The worst thing you can do is panic and make knee-jerk financial reactions to estate and gift tax changes that may or may not happen. That said, it is important to have a financial plan and to review your estate plan regularly as you prepare for the uncertain future. If annual gift-giving is part of your long-term estate plan, then you will want to incorporate that into your shorter-term plans to make sure you take advantage of the higher exemptions while they are available. Just be careful not to make poor, hasty decisions now that could damage your estate down the line.
For a better understanding of potential tax law changes and for help in refining your business plan, estate plan, tax plan and overall financial plan, contact Illumination Wealth today for a no-obligation introductory consultation with one of our exceptional financial advisors.