Three of President Biden's Proposals and Their Possible Effect
March 1, 2021
By Kyle Irvin, J.D. & Anthony Lamb, J.D.
Security National Wealth Management
With a Democratic President and a Democratically controlled House and Senate, it is likely that we will see new tax policy coming from Washington. How soon could such changes be effective? Well, let’s take a look at history.
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President Bill Clinton was sworn into office for his first term on January 20, 1993 following the presidency of George H.W. Bush. Later that same year on August 10, 1993 the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) was enacted which raised income tax rates for some individuals and corporations retroactive to January 1, 1993. In addition, OBRA 93 increased the two highest estate and gift tax rates again retroactively to January 1, 1993. Therefore, tax policy changes in August 1993 were made retroactively effective for taxpayers as of January 1, 1993, even though there had actually been a different president and congress in office on January 1, 1993.
Thus, there is some historical precedent for retroactive tax policy changes to the beginning of a presidential transition year. Whether or not that same path would be charted this year is anyone’s guess, but it is not outside the realm of possibilities. (KPMG report: Biden’s tax proposals, August 24, 2020).
Three Biden Policy Proposals
If subsequent tax changes could be effective as of January 1, 2021, what potential tax policy changes will we be tracking in the new Biden administration? There are three main Biden policy proposals that could have a large impact on our customers.
1. The Federal Credit for Estate and Gift Taxes.
Currently, the unified credit for estate and gift taxes for the year 2021 is $11.7 million per person. Meaning that a married couple has the ability to transfer, collectively, up to $23.4 million to their children without paying any federal estate tax under current law. This credit “coupon” is available and tracked for each person during their life and upon their death, but the large exemptions obviously allow for a tremendous transfer of tax free wealth to beneficiaries.
Though a detailed plan has yet to emerge, Biden has stated in the campaign that he would favor a return to estate and gift tax law as it existed in 2009, where the exemptions for estate and gift tax were $3.5 million per person with a maximum rate of 45% instead of 40%. Therefore, if that law went into effect, an individual’s ability to gift will be reduced from $11.7 million down to $3.5 million, or from a couple’s perspective, from $23.4 million down to $7 million. Individuals should review their estate plans if their plans were heavily dependent on the higher exemptions to avoid tax.
(A Look at Biden’s Tax Proposals, ISU Center for Ag Law and Taxation, Oct. 20, 2020).
2. Eliminating the Step-Up in Basis for Capital Gains at Death.
Biden has proposed the elimination of the step-up in basis for assets at an owner’s death. This could create a huge tax bill for family farms as they pass from generation to generation. As an example, if I bought a piece of real estate for $100 an acre, and the value increased throughout my lifetime to $9,000 an acre, I don’t pay any capital gains tax on that $8,900 per acre value appreciation unless I actually sell that same piece of real estate during my life and have to pay tax on the $8,900 capital gain. If however, I die, under current law the capital gain basis of that piece of real estate gets “step-upped” at my death to its value on my date of death. So at my death, current law, allows the basis to go from $100 to $9,000. If my family sells that same piece of real estate after my death for $9,000, they pay no capital gains tax because the basis ($9,000) as a result of the step-up now matches the sale price $9,000.
If the step-up in basis was eliminated, or reduced, one can see what a large impact that could have on potential plans which are focused on capital gains planning. Again, if the step-up in basis is something that was essential to your plan, individuals should start reviewing those plans ahead of any kind of legislative change that may come in this area. (Id.)
3. Tax Free Like-Kind Exchanges.
A 1031 “like-kind” exchange, which is named from its place in Section 1031 of the Internal Revenue Code, is another useful tool where capital gains can be deferred if an investment or business property is exchanged for a replacement property. In order to defer capital gains, a new property must be purchased within 45 days and if that window is missed then the sale becomes a taxable event. Under proposed tax policy released during Biden’s campaign, 1031 exchanges would be eliminated for any tax payers with an annual income in excess of $400,000.
The 2017 Tax Cuts and Jobs Act made 1031 exchanges available only for “real property”, eliminating potential exchanges of personal property, but this potential change would eliminate exchanges all together. This coupled with other proposals such as the aforementioned elimination of the step up in basis may have a significant impact on owners of business and investment real estate. (Id.)
Have any questions?
We will continue to keep our customers updated on these particular tax policies as various proposals potentially make their way through Washington. Awareness is the first step in formulating a plan to deal with a problem. If you have questions about your current plan, or would like to review your current plan with one of our professionals, contact us today. As with any legal or accounting matters, please consult your attorney or accountant.
IMPORTANT NOTE: This article is for information purposes only, and Security National Bank is not a tax adviser company. There may be additional guidelines and information, regarding your personal tax situation, not included in this article. For more information, you should always contact your tax adviser or visit the IRS website.