When planning the future of your estate, it is important to consider the capital gains rules impact on estate planning. Many have a general idea of how they want their estate divided when they die but are unsure how to accomplish that in the most effective way. It is crucial to prepare for the impact of taxes on your estate and beneficiaries. Capital gains taxes can especially influence an inheritance, and this is even more relevant under President Biden’s proposed new tax rates. Consulting an experienced attorney can help reduce the impact of these new rules and preserve your legacy.

What is a Capital Gains Tax?

When assets are sold at a profit, called a capital gain, the tax on that profit is known as a capital gains tax. Just as you pay taxes on your wages, capital gain taxes are designed to tax income earned from the sale of assets such as homes, stocks, or business properties. Unlike regular income tax, capital gains taxes are historically set at lower rates, and you are only required to pay them when you sell the asset at a profit.

For example, if you own a home, you won’t owe capital gains tax while you live there, even as the value increases. The tax applies when you sell the property at a profit. These taxes also come into play when assets are transferred through a will after someone dies. Without proper planning, capital gains rules impact on estate planning significantly, leaving your beneficiaries with unexpected tax burdens.

What are the Proposed Capital Gains Tax Rates?

The proposed new capital gains rules impact on estate planning by increasing the tax rates for wealthier taxpayers. President Joe Biden’s plan aims to raise capital gains taxes on the wealthiest taxpayers for individuals earning over $1,000,000 annually. The current capital gains tax rates for high-income taxpayers are 15%, 20%, and 23.8%. Under the proposed plan:

• The top income tax rate will increase from 37% to 39.6% for those earning over $400,000 annually.
• The long-term capital gains tax rate for those earning over $1,000,000 will also rise to match the 39.6% rate.

The plan also proposes ending the “step-up in basis” rule, which currently allows heirs to use the market value of inherited assets to minimize tax liability. Without this rule, heirs may face higher capital gains taxes when they sell inherited property.

How the Proposed Tax Rates Can Impact Estate Planning

The capital gains rules impact on estate planning becomes clear when you consider their effect on your beneficiaries. If your estate exceeds the proposed tax thresholds, your heirs may face a substantial tax bill alongside their inheritance.

For example, the real estate market has seen home values increase dramatically. Current capital gains exemptions remain at $250,000 for individuals and $500,000 for married couples. If you sell your home, the profit may push your annual income over $1,000,000, triggering the new higher capital gains tax rate.

Proper estate planning can mitigate these issues. It’s vital to consult an experienced attorney to ensure your estate is structured in a way that minimizes tax exposure for your loved ones.

How to Potentially Avoid the New Capital Gains Tax

You don’t have to let the new capital gains rules impact on estate planning negatively affect your plans. There are strategies available to reduce or avoid excessive capital gains taxes, including:

• Making Charitable Contributions: Donating appreciated stock can offer tax deductions for the market value while avoiding capital gains taxes.
• Selling Assets Early: Selling appreciated assets before the new tax rates take effect may allow you to avoid the proposed increases.
• Converting to a Roth Account: Moving assets into a Roth account can help avoid higher capital gains and income taxes.

These strategies, among others, can help protect your estate from the financial burden of the new tax proposals. Discuss your options with an experienced estate planning attorney who can assess your situation and recommend the best course of action.

Get Help From Our Experienced Estate Planning Attorneys to Develop a Tax-Saving Estate Plan

To minimize the capital gains rules impact on estate planning, it is essential to consult an experienced attorney who understands these tax regulations. At Boyer Law Firm, we work with clients to ensure their estate plans are structured to honor their wishes while reducing tax exposure for their loved ones.

With offices in Miami, Orlando, Jacksonville, and New York City, we are ready to help you protect your legacy. Contact us today to schedule a consultation. You can reach us through our online form or by emailing us at [email protected]. Don’t forget to sign up for our monthly legal updates to stay informed on estate planning strategies and tax changes.