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How Might Biden's Tax Plan Affect You? Thumbnail

How Might Biden's Tax Plan Affect You?

Posted by John Posey

If you’re wondering how President Biden’s tax plan may affect your situation, review this flowchart for a quick review. The most noteworthy change from my perspective is the treatment of capital gains at death. To the extent you have appreciated assets (excluding pre-tax assets like IRAs, 401ks, and most annuities) your heirs currently receive what is referred to as a step-up in cost basis upon passing. This means the cost basis for determining any capital gains is based on the fair market value of assets at the decedent’s date of death which is often higher than the original cost basis. Under Biden’s proposal, the step-up in cost basis would be eliminated and now the heirs would receive the decedent’s cost basis, paying capital gains tax on any gains – which could be particularly significant for assets held for many years, in some instances generations. This is a substantial difference in how the system works today and I suspect tax planning pandemonium to ensue should it come to fruition. For farm families and anyone with highly appreciated illiquid investments like real estate in particular, it could be very painful to be forced to sell those assets to cover tax liabilities. Careful and thoughtful planning will become ever more important to avoid adverse financial circumstances should this come to pass.

Before you make any significant planning decisions, you should know we are still in the proposal stage. It’s all speculation until the legislation is officially passed, but be aware and ready to prepare if you have low-basis assets.  In my opinion, it seems like the elimination of the step-up in basis should be a high hurdle given the potential ramifications to many middle-class Americans as highlighted in this Forbes article.  

For farm families, Paul Neiffer, author of the Agribusiness Blog | Farm CPA Today, provides an example of how a family farm passing to the next generation might look under today’s proposals in the April 29, 2021 edition. There are some new proposals under the American Families Plan that could change if and when transfer taxes are due based on whether the heirs continue to own AND operate the farm. In short, some changes could be coming down the road, but probably not until year 2022 or beyond. We’ll keep you in the loop as things evolve.

Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.