Tax policy used to be quite boring and predictable. But in the last decade, it has become dynamic in a way that tax advisers do not like: it is changing with the political party in power.
This means that it is increasingly difficult for individuals who want to make long-term decisions regarding their earnings, savings and giving. And advisors are likely to give guidance on what is the best decision at the moment, because the future is too vague.
Shortly after Joseph R. Biden Jr. elected president in November, I wrote a column looking at the opportunity cost of making tax-related decisions. It was not easy to assign the best tax strategies.
At that point, the decisive factor was whether the Democrats would gain control of the Senate through two races in Georgia. Few were willing to predict that both Democrats would beat the current Republicans, but that was what happened. And their victories have Mr. Biden given a clearer path to bring his agenda to its right.
The question for taxpayers, then, is now: what happens if Mr. Can bidding begin to introduce tax policy changes?
‘It’s really hard to predict at any time how Congress is going to react in terms of tax policy; it’s particularly difficult to predict this year, ”said Howard Gleckman, a senior fellow at the Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution. “But my point is that in the current political dynamic, it will be easier to get the tax cuts he talked about, rather than the tax increases.”
The caveat is that the Biden government has many things on the agenda before tax, namely the coronavirus pandemic and its vaccination, as well as the faltering economy and the stabilization of the unequal recovery of jobs.
“We’re not going to see any major tax changes at the moment because there are more urgent things to worry about at this point,” said Brian Glavotsky, a tax partner in family office services at Wiss & Company, an accounting firm.
Other analysts have suggested that if the pandemic looks better by the end of the summer, then tax changes could be addressed.
With this in mind, the best way to consider what you need to do in 2021 is to think about what you need to do in the short, medium and long term. There is a lot to think about, so I am going to divide this topic into two columns. This week I’m going to look at long-term issues; next week I’m about the more immediate tax issues that could bubble up this year.
The biggest potential long-term change involves the estate tax. But unlike previous changes, the tax code can be amended in a way that affects everyone who has something of value to leave to the heirs.
For decades, assets were valued at the death of the owner, even as the value increased. This so-called step-by-step rule works as follows: if a share bought for $ 1 is worth $ 10 when the owner dies, the profit is $ 9. But when the asset is transferred to heirs, the built-in profit erased because the base value is now $ 10 and no capital gains tax is due.
This treatment applies to any asset, from liquid bonds and private investment partnerships to a family home. If the total value of the estate is less than the current release level of $ 11.7 million for an individual or $ 23.4 million for a couple, no estate duty is payable either.
A bid administration can change this for logical reasons and turnover reasons. At one point, strengthening the base made sense. Imagine trying to capture the capital gains from AT&T shares that your grandmother bought in 1943 when the record keeping was done with a pencil and paper. Today, cost-base information can be retrieved within seconds.
But two different groups of people expressed concern about the loss of the loophole: the rich and the moderate.
If you’re Jeff Bezos or Elon Musk, the two richest people in the world who increase your long-term interests in Amazon and Tesla are huge savings on capital gains taxes, because they’re going to pay regardless of estate taxes.
But for people with a more modest wealth, say someone lucky enough to inherit a home or a stock portfolio, the loss of increase could be even greater.
Robert S. Seltzer, founder and president of Seltzer Business Management in Los Angeles, said that when his mother died, he inherited her home at the top of the real estate bubble. The original cost in the 1970s was less than $ 70,000, but the home was valued at about $ 500,000. By the time he sold the house in 2010, it was worth $ 200,000 less.
“I actually got a capital loss when I sold it,” he said. Seltzer said. If it did not turn up for the increased tax benefit, I would have had to pay a capital gain of $ 350,000 to $ 400,000 because I would have inherited my parents’ $ 70,000 base. ‘
For the Black community, the prospect of an heir paying capital gains tax on inherited property could help maintain the racial wealth gap, says Calvin Williams Jr., CEO and founder of Freeman Capital. He noted that the average Black family passed on $ 38,000 to heirs, while the average white family passed on $ 140,000.
The loss of the increase in the base will have a greater impact on the efforts to reduce the black wealth gap, said Mr. Williams said.
“We need every penny to carry out the transfer,” he said. ‘I understand and appreciate what they’re trying to do, but it’s a very wide hammer at the moment. If focused more closely, it is more beneficial to communities. ”
If this change were to take place, people with greater wealth could convert the assets they trusted, said Edward Reitmeyer, a partner in charge of tax and business services at Marcum, an accounting firm. People with access to more sophisticated planning can place assets with greater built-in capital gains in a trust and leave others – such as cash – directly to heirs.
This strategy would minimize the capital gains tax that their heirs would pay. But it is not difficult to see how people without access to sophisticated tax planning will struggle with the tax.
For the rich, the concern about the estate and gift tax is that the federal exemption level will be reduced – said Mr. Biden said so much – and that the tax rate could be raised.
While Democrats control the legislature and executive, there are concerns that the release level could drop to $ 5 million or even $ 3.5 million, where it was when President Barack Obama took office. (The current level, set in the tax reform in 2017, is expected to decline in 2025.) For the richest in the country, the rate itself is higher. It now stands at 40 percent, but it was up to 55 percent in 2001.
Possible changes to the exemption rate weigh the wealthy Americans, who have the choice to use the tax benefit now to make a big gift before any changes can become law, or wait to see how the year plays out.
Some affluent people are worried that a government in Biden could introduce estate and gift tax changes retroactively on January 1, said Marya P. Robben, a partner at law firm Lathrop GPM. In anticipation, they now want to make great gifts to take advantage of the gift tax exemption.
“If I had not given it away earlier, I would have had to do it now,” she said. Robben said about the mindset of her clients. ‘If the change in estate duty is not retroactive, I’m better off. If it’s retroactive, it’s not going to get any worse for me than it is now. ”
But others bet on any retroactive change in estate and gift taxes. “Congress can do what it wants, but Congress rarely applies tax increases retroactively,” he said. Gleckman said.
Mr. Reitmeyer said the tightness of Democrats’ control over the Senate would also be a bulwark against retroactive changes. “I think there are a lot of centralists who really do not want to work for it,” he said.
Next week’s column will focus on shaking votes in Congress, especially on short- and medium-term strategies.