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Home » Estate Planning » New Majority May Push for Transfer Tax Expansion

New Majority May Push for Transfer Tax Expansion

March 4, 2021 by Larry Parman, Attorney at Law

estate taxNow that we have a new administration and slim Democratic majorities in both chambers of Congress, there are some shifting taxation priorities. Of course, there is formidable resistance from the other side of the aisle.

There are those clamoring for more taxes on the wealthy and proposals that would expand federal transfer taxes. In this post, we will look at potential changes to the federal estate tax exclusion and the step-up in basis.

Potential Exclusion Reduction

The federal estate tax exclusion is an amount that can be transferred before the remainder would be subject to federal estate tax at a top rate of 40 percent. This exclusion is subject to change via legislative mandate and has changed multiple times over the last couple of decades.

In 2010, the federal estate tax was repealed for one year by a provision in the Bush era tax cuts. This provision would have sunset at the end of that year and the tax would have returned to $1 million exclusion.

Then the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) was enacted at the end of 2010 that established a $5 million exclusion for 2011.  This same exclusion was retained in the American Taxpayer Relief Act of 2012.

This $5 million exclusion, adjusted for inflation annually, remained in place through 2017 when it rose to $5.49 million. In December 2017, the Tax Cuts and Jobs Act was passed, which established an $11.18 million exclusion for 2018.

This $11.18 million exclusion has been adjusted for inflation since so this year, in 2021, it stands at $11.7 million.

This provision of the Tax Cuts and Jobs Act will sunset at the end of 2025, when the exclusion will return to the $5.49 million from 2017, adjusted for inflation.

Whether this happens or not is in question because President Biden has called for the tax exclusion to return to “traditional levels.” Since it was in the $5 million range from 2011 through 2017, he was probably referring to this level.

There is no reason to think President Biden would want the exclusion to be lower than $5 million, but the timetable for reducing the exclusion could be accelerated if a new tax law is passed. Others have recommended even lower exclusions, but without much support.  We will monitor the situation and pass along any updates if and when they become available.

Possible Elimination of Stepped-Up Basis

The other possible change could effect far more people.  Capital gains taxes apply if you sell an asset that has appreciated in value while in your possession. Under current law, if you inherit an appreciated asset, you are not responsible for taxes on the gains that occurred during the life of the person that left you the inheritance.

Inherited assets currently get a “stepped-up” basis to fair market value, so you start anew when you acquire the asset. If you realize a gain going forward, you will pay capital gains tax on the increase in value.

President Biden has proposed eliminating the step-up in basis and a higher long-term capital gains rate. Currently, the maximum long-term capital gains rate is 20 percent and short-term gains are taxed at your regular income tax rate.

His proposal would tax long-term gains at your regular income tax rate if your household taxable income is $1 million or more.

Many people take advantage of the step-up in basis to transfer wealth to the next generation tax-free. This would change the estate planning playing field, and is another issue we will follow closely.

Schedule a Consultation Today!

We know it can be a bit disconcerting to discuss personal matters with an attorney you have just met, and this is why some people procrastinate. This is understandable.  But when you choose our firm, you can rest assured you will feel comfortable from the start.

Our goal is to help you develop a plan that allows you to live in comfort and craft your legacy for the benefit of your loved ones. There are different ways to do this and the optimal course of action will depend on your circumstances.

Personalized attention is key and is what you will get when you choose our firm. If you are ready to get started, you can schedule a consultation at our office in Oklahoma City if you call 405-843-6100.

There is a contact form on this site you can use to send us a message.  If you reach out electronically, you can expect to receive a prompt response.

  • Author
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Larry Parman, Attorney at Law
Larry Parman, Attorney at Law
Founder and Owner at Parman & Easterday
After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.
Larry Parman, Attorney at Law
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