The federal estate tax is likely to affect more people under the President Biden administration.
The estate tax threshold has been farm, ranch, small business, and entrepreneur friendly in recent years under President Donald J. Trump.
The current threshold sits at $11.7 million for an individual and $23.4 million for a couple filing jointly.
Any amount above this was taxed at 40 percent.
At this level, many American only had to plan for state estate taxes.
According to a recent The New York Times article titled “It May Be Time to Start Worrying About the Estate Tax,” you should not expect these thresholds to remain.
In fact, current proposals include making changes to how both estates and inheritances are taxed.
What should you know right now?
Step-up in basis may be eliminated.
Folks, this is really bad.
What is the “step-up in basis”?
The step-up in basis means the value of an estate asset is revalued on the date of death.
Let me bring this close to home.\
Say your parents bought the home where you grew up for $50,000 in the 1970s, and now the home is valued at $300,000.
If your last surviving parent dies this year, then your tax basis will be stepped-up to $300,000.
Should you sell the home shortly thereafter for $300,000, then you would pocket the $300,000 sales proceeds tax free.
On the other hand, if President Biden eliminates the step-up in basis, assuming the same facts, then you would pay capital gains taxes on the $250,000 increase in value.
Now you understand how the step-up in basis works.
Although this will likely provide billions to the government coffers from the very wealthy, it will also impact those of us with moderate wealth.
Inheriting a family home will now carry a more significant tax burden, even if the home is worth a modest amount.
The estate tax may change sooner than anticipated.
Although the current estate tax threshold is set decrease after December 31, 2025, this timeline will likely be shortened by a President Biden.
In fact, when he was in the vice-president in 2009 under President Obama, the estate tax was $3.5 million.
Any amount exceeding the threshold was taxed at 45 percent tax above that amount.
Although it is unclear what the new federal exemption threshold will be, it could be similar to the 2009 tax legislation.
That is what Biden has stated.
Whether you have an estate valued in the millions or a family home, you may want to review your estate plan and make updates in response to any new tax legislation.
Reference: The New York Times (March 12, 2021) “It May Be Time to Start Worrying About the Estate Tax”