Now that the Georgia runoff elections are behind us, the stage is set: Joe Biden will be President of the United States, Democrats will control the House, and a 50:50 split in the Senate has favored Democrats since Vice-President-elect Kalama Harris holds the tiebreaking vote. What could this mean for future tax reform?
New administration and congress: President-elect Biden and many Democrats fought to reform the current tax regime, including changing income tax rules and aspects of wealth transfer. While recent election results increase the likelihood of major democratic proposals being passed, swift and comprehensive tax reform appears unlikely. A 50:50 split in the Senate makes it difficult to implement some of the more progressive proposals made by the Democrats, as only a Democratic Senator could be a roadblock. Such suggestions include:
- Reduction of the estate and gift tax exemption from $ 11.7 million to $ 5 million (or possibly $ 3.5 million) before the scheduled sunset on January 1, 2026 (as explained below). Some commentators suggest that an accelerated reduction could be applied retrospectively from January 1, 2021.
- Increase in the estate tax rate, which is currently 40 percent.
- Eliminating the automatic adjustment of the income tax base of assets to their fair value at the time of death, often erasing any capital gain from a deceased’s estimated assets.
2021 exceptions and exclusions: The IRS has announced that the amount for estate and gift tax exemption will increase from $ 11.58 million per person to $ 11.7 million per person in 2021. Even if the future government of Biden and the Democrat-controlled Congress take no action, current law stipulates that these increased exemptions will decrease to $ 5 million per person (upwardly adjusted for inflation) on January 1, 2026. Projections show that the exemption would be roughly $ 6.5 million per person at the time.
Every year, each person is allowed to give a gift to another person up to a certain amount without incurring a gift tax liability – this is known as “annual exclusion”. Annual foreclosure is a powerful tax-saving tool as the person giving the gift can transfer assets without using any part of their estate and gift exemption amount. The annual exclusion for 2021 remains at $ 15,000 per donor, and that amount is per recipient (for example, a child can give mom and dad each $ 15,000 without incurring gift tax). Married couples can give up to $ 30,000 to each affected person in 2021 without taking advantage of their estate or gift tax exemptions.
January 2021 interest rates: Continuing the record low interest rate trend, the IRS recently published amended Federal Applicable Interest Rates (AFR) for January 2021. The short-term (less than three years) is 0.14 percent, medium-term (three to nine years) 0.52 percent and long-term (more than nine years) 1.35 percent.
Regardless of the latest election results, current factors such as asset depreciation as a result of the COVID-19 pandemic, record low interest rates and historically high real estate and gift exemptions offer unique opportunities to minimize your tax exposure. In a previous customer alert found here (Planning with Low Interest Rates and Temporarily Discounted Assets), we discussed various tax efficient strategies to consider including: intra-family loans; Grantor Retained Annuity Trusts; Sales to Deliberately Defective Grantor Trusts; and non-profit lead annuity trusts. In addition, consideration should also be given to taking advantage of the higher exemptions now, especially for individuals with an estimated gross estate of more than $ 3.5 million and married couples with a combined estimated gross estate of more than $ 7 million. USD.