Financial planners and accountants across the land have their eyes on Washington D.C. this month as Democrats on the House Ways and Means Committee put legislation together to raise $2.9 trillion over the next ten years. Much like his predecessor, President Biden is attempting to put together a budget and alter the tax landscape without input from the opposing party. Democrats maintain the thinnest of legislative majorities, which may lead to a variety of outcomes. The purpose of this post is to look at two areas that may change in the tax code, either of which could have a profound effect on families and their financial plans: federal capital gains taxes and federal estate taxes.

Capital Gains Taxes

The most pressing concern for our clients right now is potential changes to the capital gains system. The reason these changes are so front-of-mind is that, when they are made, changes to capital gains are likely to take effect immediately, rather than at the start of the next tax year. Congressional Democrats rolled out a proposal this week that called for a top capital gains rate of 25% for taxpayers making over $400,000 (the 3.8% surcharge would still apply on top of this rate for those taxpayers subject to it). This proposed rate is well below the top rate outlined by President Biden during his campaign for office.

In assessing whether an investor ought to sell assets ahead of potential changes to the capital gains rates, our general view is as follows: If the rate only increases to 25%, investors in the top brackets may wish to sell and recognize gains now (under the current rules) for any assets they intend to sell over the next one to two years. Beyond this timeframe, it is difficult to make an informed decision on whether to sell now and pay the gains or sell later under whatever the new, higher rates are. There are a variety of factors at play in this analysis, including investment returns, amount of time invested, future federal capital gains rates, what state an individual or beneficiary may reside in at some later date — just to name a few. Our team is happy to the walk through the specifics of your situation with you to determine the best course of action.

Estate Taxes

The federal estate tax rules are currently set to change in 2026, at which time the amount that an individual may pass free of federal estate tax will be cut from about $12 million to about $6 million. Congress is currently debating whether to reduce this estate exemption sooner, and this week’s report by the Ways and Means Committee proposed reducing the exemption at the end of the 2021 tax year.

Planning on this front falls under the heading “use the exemption while you have it” and often involves the use of irrevocable trusts. Attorneys and accountants can help individuals give assets away while they are living, rather than at death, so that today’s higher exemption can be applied. These gifts can be made between spouses or between generations, and can involve real estate, investable securities, business interests, and everything in between. The last few months of 2021 are likely to see a lot of activity in this area, so do not hesitate to reach out to your attorney and accountant if you are considering this sort of planning.

It is important to consider the interplay between the estate and capital gains taxes whenever engaging in estate planning, because gifting an asset may bring great estate tax benefits while also carrying a terrible result on the capital gains side. Each system assesses substantial rates and each is subject to change depending on who has power in Washington. Income taxes often come into the mix as well, since heirs who receive retirement accounts will owe the income tax that their parents deferred all those years. Please reach out to our team if you would like to talk about how these taxes (and potential changes to them) affect you and your family.