What Will That Cost Me In Taxes

This is the question asked to me so many times every week. Sometimes we are talking about a current matter, and I can answer that question fairly easily. However, there are questions like the one I received recently about a future inheritance that is worth millions of dollars and includes various assets like IRA’s and highly appreciated stock. That answer gets a lot more complex and uncertain.

Why is it so difficult to respond to these questions with confidence? The Tax Cuts and Jobs Act (TCJA) passed in December 2017 was a fairly sweeping change to the tax system for both individuals and corporations. The law lowered individual and corporate tax rates, increased the standard deduction, eliminated personal exemptions, made more people eligible for the child tax credits along with many other changes. But, the law was only put in place through the year 2025 and we have a highly contested political situation right now that could result in changes before 2025.

So, what happens if we make it to 2026 with no changes? If nothing changes, the laws would go back to those in place before the new law took effect. We’ve seen these sunsetting laws before. When the sunset date approaches, the political discussions start as to whether the law should be extended.
If we have a political change at the next election, what will it cost me? Kiplinger has an interesting article that outlines each Democratic candidate’s tax plan. Each one has some specifics that make it their plan, but they also have a lot of similarities.

Some common themes of the Democratic Plans are:

•  Increased tax rates – The increased taxes vary slightly in form, but effectively go back to rates pre -TCJA rates or even higher.
• Increase the payroll tax wage base – Currently wages above $132,900 are excluded from Social Security, so several plans eliminate that cap. That’s an additional 12.4% (6.2% employee/6.2% employer) tax.
• Increase or eliminate capital gains rates – The current law provides beneficial tax rates to investments that you hold for longer than a year. Several proposals would tax these gains as ordinary income or at a rate higher than the current top rate of 20%.
• Estate tax- The estate tax exemption is currently $11.4 million. That means an individual can pass $11.4 million on to heirs without paying an estate tax. The heirs then get a step-up in basis to the fair market value on that date. Most of the plans want to lower that exemption significantly. Several reference returning to 2009 levels of $3.5 million and some even want to eliminate the step-up in basis on certain assets.
• Wealth Tax – This is a common term among several plans that want to tax the net worth of the richest Americans. This is an annual tax at 2%-3% on accumulated wealth above an established level.
• Tax Credits – Most of the plans try to provide tax credits to help with the costs of caregiving, adoption, and for low income earning families.

So, what will that cost you in taxes? We don’t know for sure right now, but I’m confident it will cost most people more in the future than it does right now. We just don’t know when that change will occur. If any of these changes might impact you, we should schedule some time to discuss.