2020 has been a year to remember for so many reasons: a global pandemic, the race to a vaccine, and an election with record-breaking voter turnout.
President-elect Joe Biden and his running mate Vice President-elect Kamala Harris campaigned on a platform of detailed proposals, including changes to certain areas of tax law. Here are some reforms that we might see during a Biden presidency, and the effects those changes might have:
Eliminating the step-up in tax basis
Biden has proposed that the current step-up in tax basis upon death be eliminated. This means that a beneficiary would take the decedent’s basis. Here’s an example of how the step-up works now, and how it would change under the new proposal.
Let’s say that my neighbor purchased her San Francisco home in 1949 for a whopping $50,000, and the property has appreciated throughout her long life. If she decides to sell her house prior to passing away, the $50,000 purchase price would get a full step-up to the current value of $1,050,000, and that would incur $1,000,000 in long-term capital gains.
However, if she decides to bequeath the house to her children and they sell it after her death for the same amount ($1,050,000), they would not need to pay any capital gains tax because the basis is the fair market value (selling price). This would be a huge tax break for my neighbor’s children. (For the purposes of this article, this example excludes the $250,000 homeowner exemption.)
Biden proposes getting rid of this exemption, so in our example, the $1,000,000 in capital gains tax would need to be paid regardless of whether the house was sold before or after my neighbor’s death. It would still be possible to defer the tax by holding the property as a rental. However, Proposition 19 (passed in the 2020 California elections) would reassess this property as fair market value increasing the property tax from around $600 per year to around $15,000 per year.
Reducing the exemption
Currently the estate tax exemption is $11,580,000 per person and is set to increase to $11,700,000 in 2021. The exemption is scheduled to “sunset” in 2026 and decrease to around $6,000,00 per person. This means that for 2020 up to $11,580,000 (or $23,160,000 if married) can be passed to beneficiaries (reducing this amount by taking into account lifetime gifts) without paying any estate taxes for estates under this amount. Currently 99.8% of Americans fall under the exemption.
Biden campaigned on lowering the exemption to around $3,000,000 per person, which would mean that beneficiaries of Americans with estates of $3 million ($6 million for couples) could face paying estate tax on their inheritances.
These proposals are based on Biden’s campaign promises and interviews. We will continue to update you as the Biden presidency progresses. If you’re interested in discussing your options, please contact us here at Weintraub Tobin.