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As the federal government transitions from pandemic recovery to funding future infrastructure needs, President Biden and lawmakers are formulating several potential tax law changes that may affect individual taxpayers. It is important to note that these proposals will most likely be modified from their current state over the next several months. Your PalomarWealth team is prepared to discuss your specific situation and how these changes could affect your financial planning. We can help breakdown complex issues, explain potential outcomes, and discuss possible mitigations designed to reduce your tax burden. Now is the time to begin the conversation with your financial professional, CPA, and/or attorney, so you are prepared prior to the end of the year.
The examples below are simple illustrations to highlight the potential changes. Many factors can and will affect individual outcomes.
The cost basis is the price paid when you originally purchase an asset. Currently, if you inherit an asset, your cost basis is the market value of the asset on the date of death.
Under the current proposal, the elimination of stepped-up cost basis would apply only to those making $1 million+ annually, $2 million+ if married filing jointly. The definition of what constitutes earned income for this provision has not been established.
Another important note, even if heirs decide to keep an inheritance and not sell the assets, any gains from the original owner's cost basis are taxable upon inheritance.
Capital gains are the taxes you pay when you sell an asset (i.e. investments). This is separate from your earned income and is currently taxed at a lower rate. Depending on your income level, your capital gains rate may be 0%, 15%, or 20%. An asset can be property, such as real estate and collectibles, and also investments, such as stocks and bonds.
Under the current proposal, individuals with $1 million or more in income annually or married couples with $2 million or more combined would be subject to the increased capital gains rate of 39.6%. Additionally, the Medicare surtax of 3.8% would increase the total rate to 43.4%.
If you give a gift of property, such as stock, you are generally limited to giving $15,000 per individual per year (adjusted for inflation). Your lifetime federal gift limit total is $11.7 million, after which any additional gifts are taxable at 40%. State tax rates will vary. The gift tax is paid by the donor, not the recipient of the gift.
When an individual dies, the fair market value of their assets constitute their estate. Estates with significant value can be subject to a tax if unable to exclude the entire value.
Those with assets over $3.5 million would potentially see an increase in taxes under the new proposal. The new proposal reduces the annual gift limit from $15,000 down to $10,000, reduces lifetime gift limits to $1 million; estates pass to heirs tax free up to $3.5 million. Amounts over these limits would be taxable at 45%.
The current proposal would increase the highest bracket for those earning $400,000 or more annually to 39.6%. Although the current proposal only affects the highest bracket, it would be prudent to consider the impact if all brackets were affected.
Our first priority is helping you take care of yourself and your family. We are ready to partner with you during this time of uncertainty to help you make informed decisions. If you are ready to start the conversation, please enter your contact information in the form below.