Since Joe Biden is now president and the Democrats control the House and the Senate, it is very likely that we will see some significant legislative changes. A couple of them may impact taxes on inheritances, and we will share the details in this post.
Federal Estate Tax Exclusion
The exclusion is the amount that can be transferred before the federal estate tax would be levied on the remainder. In 2010, there was an estate tax repeal due to a provision contained within the Bush era tax cuts.
Those cuts were scheduled to expire or sunset at the end of 2010. If there were no changes implemented before the end of the year, the estate tax would have returned with a $1 million exclusion.
At the end of that year, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted. It established a return of the tax with a $5 million exclusion for 2011, and it remained in place with inflation adjustments for the next seven years.
In December of 2017, the Tax Cuts and Jobs Act was enacted, and it essentially doubled the estate tax exclusion for 2018.
There have been inflation adjustments since that time, and in 2021, the exclusion is $11.7 million.
During the campaign, then-candidate Biden stated that he would like to see the estate tax exclusion return to “traditional levels.” Since it was $5 million for so long, it is logical to assume that this is the level that he was we referring to when he issued the policy statement.
The provision in the Tax Cuts and Jobs Act that increased the estate tax exclusion will sunset when 2025 comes to a close. If there are no changes between now and then, the exclusion will go back to the $5.49 million that was in place in 2017 adjusted for inflation.
Now that we have Democratic majorities all around, a new piece of legislation could be enacted before then that reduces the amount of the estate tax exclusion.
Elimination of Stepped-Up Basis
If you were to inherit assets that appreciated during the life of the person that left you the inheritance, the assets would get a stepped-up basis. This means that the value for capital gains purposes would be equal to the value at the time that you acquired the assets.
To break it break down through the use of a simple example, let’s say that your uncle leaves you a thousand shares of stock that are worth $100 a share. He bought the stock some years ago when it was going for $10 a share.
The stock appreciated by $90,000 while it was in your uncle’s possession. If he would have sold the stock while he was still living, he would have paid the capital gains tax on the $90,000 gain.
You on the other hand would get a stepped-up basis, so those gains would essentially be forgotten for capital gains purposes. The meter would start running anew, and you would only be responsible for subsequent gains above the $100,000 value.
The hypothetical uncle’s situation is one thing, but imagine the magnitude of the tax-free transfer if someone like Elon Musk was to pass away and leave his Tesla stock to his heirs.
Biden has stated that he would like to do away with the stepped-up basis to place a heavier burden on high net worth individuals. The stepped-up basis could be removed for transfers that exceed a certain amount, and this is another situation that we will be monitoring closely.
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