Our Take on Potential Income and Estate Tax Policy Changes


Howard Essner, JD, Managing Director, Family Wealth Advisor
Vanessa Mavec King, CFP®, Director, Financial Planning

Most years we face uncertainty in tax planning and 2021 is shaping up to be among the most uncertain in recent memory. With so much information (and misinformation) circulating about possible changes and strategies, we thought this would be a good time to review the current tax situation, discuss some of the proposed changes and the likelihood of enactment, and then share our thoughts about what to do.

What We Know

The Tax Cut and Jobs Act (TCJA) enacted at the end of 2017 made many significant changes to individual income taxes and estate and gift taxes staring in 2018. However, because of the machinations of the budget reconciliation process that was used to pass TCJA, most of the changes came with an automatic sunset at the end of 2025. Key provisions of the TCJA that will end in 2025 include:

  • The reduction in individual income tax rates at almost all levels of income and the income thresholds to which those new rates apply.
  • The nearly doubling of the standard deduction and elimination of the personal exemption.
  • Changes to capital gains, dividend, and alternative minimum taxes.
  • Limits on how much state and local income and property taxes are deductible.
  • Doubling the estate and gift tax lifetime exemption from $5.6 million to $11.2 million per person (currently $11.7 million as indexed for inflation).

If Congress does not act, we will live under the current tax regime until 2025, and then revert to the 2017 system starting the following year. Of course, everything can change between now and then if Congress takes action.

What We Don’t Know

Many proposed tax changes are circulating in Washington. Most of the news has concentrated on the tax changes proposed by the Biden administration, but other changes (some bipartisan) are also on the table.

The administration has proposed several changes to collect more tax revenue from the wealthy. These proposed changes have been announced over the past months, but were formalized a bit more in the President’s budget proposal announced just before Memorial Day. The key provisions include:

  • Increasing the top marginal ordinary income tax rate to 39.6% from the current 37% rate.
  • Increasing the capital gain tax rate to 39.6% for taxpayers making more than $1 million a year.
  • Eliminating the step-up in basis at death for appreciated assets for gains of more than $1 million ($2 million for couples). Unrealized gains would then be taxed at death at the new capital gain rates.

The budget proposal sets 2022 as the effective date for these changes with one very notable exception. There have been reports that the budget proposal assumes that the capital gain tax rate increase for those making more than $1 million will have a retroactive effective date to late April 2021. More on this below. One item is conspicuously absent from this list; President Biden campaigned on the promise to reduce the estate and gift tax lifetime exemption. It seems that this idea is not part of the administration’s legislative agenda for this year.

We must also note that these are proposals only, and many details are still missing. As of this writing, the administration has said the the new highest marginal rate of 39.6% will apply to anyone making more than $452,700 a year, or $509,300 for couples, but currently the 37% rate applies to income of more than $523,600 for single filers and $628,300 for married couples. Likewise, the administration has said that the changes to the step-up in basis rules will not apply to family farms and businesses, but no details have been provided.

Most political commentators believe that it will be difficult at best for the Biden administration to get these proposals enacted into law. The Senate Republicans have said that they will not support tax increases. This leaves the Democrats two options: pass the tax changes through the budget reconciliation process that requires only a majority vote (as the Republicans did in 2017 with the TCJA) or eliminate the filibuster. At least two moderate Democratic senators have said that they are reluctant to support major tax increases or eliminate the filibuster. Also, after the announcement of the retroactive effective date for the capital gain tax rate increase, a few more Democratic members of Congress went on the record expressing concern. Today, uncertainty is the only certainty.

Two other tax proposals have been made in Congress that are worthy of note:

  • Reduction of the top estate tax rate to 20%.
  • Changing the starting date for Required Minimum Distributions for retirement accounts to age 75 (from the current age 72).

These proposals are included in pending bills with bi-partisan sponsors. Even so, passage of either bill remains uncertain.

What We Should Do

Even though it goes without saying, we’re going to say it anyway: Tax planning these days is a dicey proposition. While tax considerations are important in asset allocation and portfolio construction, we have always believed that taxes take a second seat to sound investment principles. With this thought in mind, our main message these days about taxes is caution. Too many times in the past we have seen clients make decisions they later regret based on some presumed Congressional action or inaction, only to see Congress act, not act, or act in an unexpected way. One must think carefully about any decision based merely on an assumption that a proposal may be enacted into law.

Most of the questions we receive these days are around capital gains, especially now that reduction to the estate lifetime exemption seems to be off the table. Many want to know whether gains should be realized to lock in the lower current capital gain rate before it changes. The announcement of a retroactive effective date back to late April throws a bit of a monkey wrench into that option. If this comes to pass, which we believe is unlikely, then it would be too late. Even then, we must remember that the proposed capital gain rate change will only apply to taxpayers with income of more than $1 million. Also, investment decisions in retirement accounts are not affected by this change. For those who will be affected by the change, it is probably best to wait to see how the legislative process unfolds, while still letting sound investment principles guide your decisions, regardless of taxes.

Some action this year is still warranted. Even though a reduction in the estate and gift tax lifetime exemption is not currently proposed, the sunset of the current exemption at the end of 2025 is rapidly approaching. If your estate will be subject to estate tax either now or after the sunset, you might consider acting soon to reduce the future tax burden while the higher exemption still exists. Possible strategies for this include outright gifts, special spousal support trusts, life insurance owned by a trust, charitable giving and grantor retained annuity trusts, among others. We are available to discuss these ideas if interested and, as always, we encourage you to speak with your tax professional for a holistic view.

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