Proposed Changes to Estate Tax and Stepped-Up Basis Rule May Impact Your Estate Plan
A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes the new administration will usher in, two possibilities are a proposal to lower the estate tax exemption and eliminate the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs.
In 2017, Congress doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued under the exemption amount, it will not pay any federal estate taxes. The vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption to $3.5 million for individuals.
Another possible tax change is how property is valued when it is passed on at death. "Cost basis" is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on the sale of property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value.
Under current law, when a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis of $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes. If the step-up in basis is eliminated, the result could be a tax increase for some individuals who inherit property that has increased significantly in value.
Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year.
If you are concerned about the impact of these potential changes on your estate plan and your beneficiaries, you should talk with your estate planning attorney.
Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment.