Laws that impact postmortem asset transfers can be changed via legislative mandate at any time. We keep a finger on the pulse of these matters so we can implement strategy adjustments when they become necessary.
Because there is now a new presidential administration, there may be a change to a very important rule that is associated with the capital gains tax. We will look at it in this post, and we will also share some relevant information about the trajectory of the federal estate tax parameters.
Step-Up in Basis
The capital gains tax is applicable when you sell an asset that appreciated while it was in your possession. In tax parlance, the act of liquidating the appreciated asset is called “realizing a gain.”
Short-term gains are realized less than a year after you acquire the asset in question, and long-term gains are realized more than year after the acquisition. The rate for short-term capital gains is equal to your regular income tax rate.
Long-term capital gains rates are variable depending on your income level. People that claim $40,400 or less do not have to pay long-term capital gains taxes. The rate is 15 percent for filers that claim between $40,401 and $445,850. For everyone else, the rate is 20 percent.
From an estate planning perspective, a question would naturally arise: if you inherit assets that appreciated during the life of the decedent, are you responsible for these gains?
At the present time, the answer is no, because you get a step-up in basis. For capital gains purposes, the meter would start running anew when you become the owner of the assets.
When he was a candidate, Joe Biden proposed the elimination of the step-up in basis. Under his plan, the revenue would be used to fund free junior-college tuition for all Americans.
A plan like this could do away with the step-up in basis for gains that exceed a certain threshold, creating an impact on high net worth individuals.
Time will tell if this proposal becomes a reality, and we will monitor the situation as time goes on. If there is any news to pass along, we will share it right here on our blog.
Sunset of Record High Exclusion
The other matter that we want to touch upon here is the impending expiration of the record high federal estate tax exclusion. This is the amount that can be transferred before the estate tax would be applied on the remainder.
In 2017, the exclusion was $5.49 million, and this was the result of a series of inflation adjustments after a $5 million exclusion was established for 2011. At the end of 2017, the Tax Cuts and Jobs Act was enacted, and it radically increased the exclusion.
It went up to $11.18 million for 2018, and there have been inflation adjustments since then. In 2020, the exclusion was $11.7 million, and the rate of the tax is 40 percent.
The tax legislation that established this exclusion is going to expire or sunset on January 1, 2026. If no legislative changes are enacted in the meantime, the exclusion will go down to the $5.49 million that we had in 2017 adjusted for inflation.
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