How the Biden Tax Plan Could Change Your Retirement

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These changes to the capital gains tax would affect nearly everyone.

 

Buckle up, retirees. There may be a bumpy ride ahead. 

While the 2020 election may be behind us, the campaign promises are not, specifically the Biden-Harris administration’s proposed changes to the capital gains tax. That means the historically low tax rates we currently enjoy might soon change, and along with it your retirement and the inheritance you thought you’d leave behind.  

 

Here’s What to Keep an Eye On 

The Biden administration has proposed the elimination of something called the “step-up in basis at death” provision. Under current tax law this provision has greatly reduced the capital gains taxes owed on an inherited portfolio. This is because you’re only taxed on the difference between the portfolio’s value on the date of death and the day the assets are sold.  

President Biden’s plan would eliminate this provision and the valuable savings it provides. When your inheritors decide to sell your portfolio, they would then owe taxes on the difference between the current value and the original purchase price. The same applies to property and assets, like your home or a business.  

 Imagine when you purchased your home it was worth $200,000 and has since appreciated in value. Upon your passing, let’s say the home is valued at $500,000. After inheriting it, your heir sells the home for $550,000. Thanks to step-up in basis, capital gains taxes would only apply to the $50,000 difference between the sale price and value upon passing. Without step-up in basis, capital gains taxes would apply to the full $350,000 profit. Yikes.  

Alternatively, there’s the option for immediate taxation upon death. In this case, your estate would owe the capital gains taxes. But what if your estate doesn’t have the cash? Assets would have to be sold to close the gap.  

The example above may be a simplified one, but it demonstrates the magnitude of what’s at stake. For many families, the implications aren’t just financial, but also personal, threatening the loss of a farm that’s been in the family for generations, or a vacation home rich in memories.  

Unfortunately, the discontinuation of the step-up in basis provision isn’t the only worrisome change. The plan also calls for an increase in the capital gains tax rate. If approved by Congress, instead of paying between 0-20% under the rate we currently enjoy, you (or your heirs) could be required to pay 40% on gains when selling your stocks, bonds, and real estate. That’s because the proposed increase would apply to those earning $1 million or more. Though that may sound like a lot, the profit from selling a home or other asset could push you over that threshold. As if losing step-up in basis wasn’t tough enough, this could be the sucker punch that costs your family the things you hold dear, forcing your heirs to sell the things you love because the tax bill is simply too costly. 

 

Stay Ahead of the Game 

Again, as of now, these are just proposals. It’s too early to say whether the changes will make it through Congress in some form or another. But we do know that the passage of even one of the parts we discussed above has the potential to upend your estate planning. 

That means asset preservation is the name of the game. And what you do today to prepare could protect you tomorrow. We’re here, along with our legal partners, to provide the strategies that allow you to keep more of your hard-earned money. Whether you don’t currently have an advisor, or are simply looking for a second opinion, we invite you to set up a no-cost, no-obligation consultation with one of our retirement planners. Contact us today. 

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