Fiscal policy used to be quite boring and predictable. But in the past decade, it has become dynamic in a way that tax consultants don’t like: it changes with the ruling political party.
This means that it is increasingly difficult for individuals to try to make long-term decisions about their earnings, savings and donations. And counselors are likely to offer guidance on what is the best decision at this time, because the future is very mixed.
Shortly after Joseph R. Biden Jr. was declared president-elect in November, I wrote a column examining the opportunity costs of making tax-related decisions. It was not easy to know the best tax strategies at that time.
At that time, the deciding factor was whether Democrats would gain control of the Senate through two disputes in Georgia. Few were willing to predict that both Democrats would defeat the incumbent Republicans, but they did. And his victories have given Biden a clearer path to bring his agenda to life.
So the question for taxpayers now is: what will happen when Mr. Biden starts implementing changes in tax policy?
“It is really difficult to predict how Congress will respond in terms of tax policy; it is particularly difficult to predict this year, ”said Howard Gleckman, senior researcher at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. “But, in my opinion, it will be easier, in the current political dynamic, to get the tax cuts he talked about, instead of the tax increases.”
The caveat is that the Biden government has many things on its agenda ahead of taxes, namely the coronavirus pandemic and its vaccination implementation, in addition to supporting the unstable economy and stabilizing the recovery of unequal jobs.
“We are not going to see big changes in taxes because there are more urgent things to worry about right now,” said Brian Glavotsky, a tax partner in family office services at Wiss & Company, an accounting firm.
Other analysts suggested that if the pandemic looked better in late summer, the changes in taxes could be resolved by then.
With that in mind, perhaps the best way to think about what 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’ll divide this topic into two columns. This week, I will look at long-term issues; next week, I will address the most immediate tax issues that may arise this year.
The biggest potential change in the long run involves the property tax. But, in contrast to previous changes, the tax code could be modified to affect everyone who has something of value to leave to the heirs.
For decades, assets were valued at the time of the owner’s death, even if the value has increased. The so-called basic increase rule works like this: if a stock bought for $ 1 is worth $ 10 when the owner dies, the gain is $ 9. But when that asset is passed on to the heirs, the embedded gain is eliminated 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 property is less than the current exemption level of $ 11.7 million for an individual or $ 23.4 million for a couple, there is no need to pay any property taxes either.
A Biden administration can change this for logical and revenue reasons. At one point, the intensification of the base made sense. Imagine trying to determine the capital gains on AT&T shares that your grandmother bought in 1943, when the records were made with pencil and paper. Today, cost-based information can be retrieved in seconds.
But two different groups of people raised concerns about losing the widening gap: the very rich and the moderately wealthy.
If you are Jeff Bezos or Elon Musk, the two richest people in the world, having your long-term holdings in Amazon and Tesla increased at the bottom is a big savings in capital gains tax, because they will be paying tax on property anyway.
But for people with a more modest wealth, say someone lucky enough to inherit a home or a stock portfolio, the loss of step-up can be even more significant.
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 housing bubble. The original cost in the 1970s was less than $ 70,000, but the house had risen to about $ 500,000. When he sold the house in 2010, it was worth $ 200,000 less.
“In fact, I had a loss of capital when I sold it,” said Seltzer. If it weren’t for the increase in the basic tax benefit, “I would have had to pay capital gains of $ 350,000 to $ 400,000 because I would have inherited my parents’ base of $ 70,000.”
For the black community, the prospect of an heir paying capital gains tax on inherited property can contribute to maintaining the racial wealth gap, said Calvin Williams Jr., chief executive and founder of Freeman Capital. He noted that the average black family passed on $ 38,000 to the heirs, while the average white family passed on $ 140,000.
The loss of the base step-up would have an even greater impact on efforts to close the blacks’ wealth gap, Williams said.
“We need every penny to make this transfer,” he said. “I understand and appreciate what they are trying to do, but it is a very broad hammer now. If it were a narrower focus, it would be more beneficial for communities ”.
If that change happens, wealthier people can exchange the assets they have placed in trust, said Edward Reitmeyer, a partner in charge of tax and business services at Marcum, an accounting firm. People with access to more sophisticated planning could place assets with higher capital gains embedded in a trust fund and leave others – like money – directly to heirs.
This strategy would minimize the capital gains tax that your heirs would pay. But it is not difficult to see how people without access to sophisticated tax planning would be affected by the tax.
For the very wealthy, the concern with property and donation taxes is that the level of federal exemption will be reduced – Biden already said that – and that the tax rate may be increased.
With Democrats in control of the legislative and executive branches, there is concern that the level of exemption could drop to $ 5 million or even $ 3.5 million, where it was when President Barack Obama took office. (The current level, which was established in the 2017 tax review, is expected to fall in 2025.) For the wealthiest in the country, the biggest concern is the rate itself. It is now at 40%, but it was as high as 55% in 2001.
Possible changes in the exemption rate have weighed on wealthy Americans, who face the choice of using the tax benefit now to make a large donation before any change becomes law or wait to see how the year will end.
Some wealthy people are concerned that a Biden government might make changes to the tax on assets and retroactive donations to January 1, said Marya P. Robben, a partner at the law firm Lathrop GPM. In anticipation, they want to make great gifts now to take advantage of the donation tax exemption.
“If I hadn’t done it before, I should have done it now,” Robben said of his clients’ mentality. “If the property tax change is not retroactive, I am better off. If it’s retroactive, I’m no worse off than I am now. “
But others are betting against any retroactive changes in property taxes and donations. “Congress can do whatever it wants, but it rarely applies tax increases retroactively,” said Gleckman.
Reitmeyer said that the Democrats’ tightening of control over the Senate would also serve as a bulwark against retroactive changes. “I think there are a lot of centrists out there who don’t really agree with that,” he said.
As votes in Congress are stirring, especially around short and medium-term strategies, it will be the focus of next week’s column.