When planning the future of your estate, it is important to consider the impact of President Biden’s proposed capital gains tax. Many have a general idea how they want their estate divided when they die but are unsure how to accomplish that in the most effective way. It is important to prepare for the impact of taxes on your estate and the beneficiaries. Capital gains taxes can especially impact an inheritance, even more so under the Biden administration’s proposed new rates. Consult an experienced attorney to reduce the impact of these new capital gains rules and preserve your legacy.
What is a Capital Gains Tax?
When assets are sold at a profit, also called a capital gain, the tax on that profit is called a capital gains tax. Just as you pay taxes on your wages, capital gain taxes are designed to collect a tax on the income in the form of profit from assets such as homes, stocks, or business assets. A major difference is that capital gains tax rates are historically set lower than the tax rates for regular income from wages. You are also not required to pay a this tax until you profit from the sale of your asset. A common example is when someone owns a home. As the property value increases over time, the homeowner will not be subject to a tax until the home is sold at a profit. Capital gains taxes can also come into play when an asset is being transferred through the execution of a will when someone dies. This is where proper estate planning is important so your loved ones are not saddled with taxes they cannot afford. Don’t let capital gains taxes unduly impact your estate plan.
What are the Proposed Capital Gains Tax Rates?
The proposed new capital gains tax rates will have an even greater impact on estate planning. President Joe Biden is seeking to raise capital gains taxes on the wealthiest taxpayers in the United States. The current long-term capital gains taxes for high-income taxpayers are currently set at 15%, 20%, and 23.8%. The Biden tax plan will first raise the top income tax rate from 37% to 39.6% for those making over $400,000 annually. Next, the long-term capital gains tax rate for those making over $1,000,000 will also be raised to match the new 39.6% tax rate.
Another major change would be the end of “step-up in basis,” a rule that allows heirs to significantly lower that tax liability by using the market value of assets instead of the original purchase price for the cost basis to determine capital gains. One option also being discussed in Congress is allowing the heirs to defer their tax liability on any assets they inherited for as long as they own the items and only assess a capital gains tax if/when they ultimately sell the assets to someone else. As you can see, there are several moving parts to this new tax plan which might affect you in the near future.
How the Proposed Tax Rates Can Impact Estate Planning?
Consider an example of how the proposed new capital gains rules impact estate planning. If your income or estate is not at these levels, then your capital gains tax rates will remain unchanged under the Biden plan. If your estate qualifies for the proposed heightened tax, then your heirs may be left footing a significant tax bill along with their inheritance. The current real estate market has seen home values skyrocket while the current exemptions for capital gains on the sale of a primary residence have remained at $250,000 for an individual and $500,000 for a married couple. If you sell your home in this current market, it could result in your income exceeding the $1,000,000 annual threshold under the plan. If you bought your home during a down economic time and realized a bigger profit due to the increase in home values, this issue can affect you directly.
There is opposition to these proposals, and the final bill that will be voted on in Congress will likely have several differences from the initial proposal discussed here. The passing of this bill could force some to rethink their estate planning approach. While these changes may not affect you, it is important to speak to an experienced estate planning attorney to discuss your estate so you can be sure in case you need to devise a new estate plan.
How to Potentially Avoid the New Capital Gains Tax
You don’t have to let the new capital gains rules impact estate planning. As new tax rules emerge, taxpayers may have some options to help avoid paying excessive capital gains taxes. Some of these potential avenues include:
- Making charitable contributions – donating appreciated stock offers a charitable deduction for the market value of the donations along with the avoidance of paying any capital gains taxes.
- Selling assets – if you sell your appreciated assets before the new tax rates go into effect, then you may be able to avoid the increased rates proposed.
- Converting assets to a Roth account – this approach could help avoid both higher income taxes as well as higher capital gains taxes.
These are just a few of the options that may be available to you if you need to devise a new estate plan because of these new tax proposals. It is important to fully assess how the current tax plan affects you and your estate and compare it to how your estate would be affected by the proposed changes being discussed in Congress.
Get Help From Our Experienced Estate Planning Attorneys to Develop a Tax Saving Estate Plan
To reduce the new capital gains rules impact on estate planning, you should consult an experienced attorney who knows those rules. At Boyer Law Firm, we help clients ensure that their end-of-life decisions are clear and honored by the courts, so their loved ones can receive their intended inheritances.
We have offices in Miami, Orlando, Jacksonville, and New York City to serve our clients. To have your case evaluated by one of our experienced estate planning attorneys, contact us online here. We are standing by to help you.