Estate taxes could hit broader group
One strategy is to give away money now
Democratic presidential candidates Elizabeth Warren and Bernie Sanders have unveiled ambitious plans to fund universal health care and other programs by hiking taxes on the wealthiest Americans. But lurking beneath proposed tax hikes on the super rich are measures that could affect a broader swath of taxpayers.
Both Warren and Sanders want to lower the amount of assets exempt from federal estate taxes — $11.58 million per person in 2020 — to $3.5 million. Sanders has also proposed increasing the estate tax rate, which now tops out at 40%, to 45% to 77%, depending on the size of the estate.
Democratic presidential candidates have also expressed an interest in narrowing or eliminating a provision in the tax code that benefits heirs who inherit assets that have appreciated in value. Now, when you inherit securities or other assets, the cost basis of those assets is stepped up to their value on the date of the original owner’s death.
If you turn around and sell the securities, you won’t owe any capital gains, even if they’ve increased significantly in value since they were purchased. Former Vice President Joe Biden has proposed eliminating the step-up to help pay his higher-education initiatives.
No matter who is elected president, the generous federal estate tax threshold is living on borrowed time. Under sunset provisions in the 2017 tax overhaul, the current exemption is scheduled to revert to about $5.5 million in 2026 unless Congress moves to increase it.
Ryan Losi, a certified public accountant with Piascik in Glen Allen, Virginia, says he’s advising clients whose estates exceed that threshold to start planning now. “November will be an indicator of whether it drops down earlier than the sunset,” he says.
If you’re concerned that lower exemptions could reduce the amount you’ll leave to your heirs, there are ways to avoid estate taxes. The easiest strategy is to give away assets while you’re still alive. In 2020, you can give $15,000 to as many people as you want without filing a federal gift tax return. As long as your gifts remain below the limit, they won’t eat into your exemption from federal estate taxes.
If you have a significant amount of appreciated stock or mutual funds in taxable accounts, you can reduce the size of your estate and lower your current tax bill by giving the securities to charity. If you’ve owned the securities for at least a year, you can deduct the fair market value of the securities when you donate them. You won’t have to pay taxes on the capital gains, and the charity won't, either.
If you’re not sure which charities you want to support, a donor-advised fund provides a tax-savvy way to make regular gifts to your favorite causes. These funds, offered by Schwab, Fidelity, Vanguard and other financial firms, allow you to make a large deductible contribution in one year and decide later how to dole out the money.
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