The estate tax may change under Biden

Tax policy used to be fairly boring and predictable. But in the past decade, it has become dynamic in a way that tax advisers don’t like: It changes with the political party in power.

That means it is increasingly hard for individuals trying to make long-term decisions around their earnings, savings and giving. Advisers are likely to offer guidance on what is the best decision at this moment because the future is too fuzzy.

Shortly after Joe Biden was declared the presidentelect in November, I wrote a column looking at the opportunity costs of making tax-related decisions. It was not easy to know the best tax strategies then.

At that time, the deciding factor was whether Democrats would gain control of the Senate through two runoff races in Georgia. Few were willing to predict that both Democrats would beat incumbent Republicans, but that was what happened. Their victories gave Biden a clearer path to bringing his agenda to fruition.

So the question for taxpayers now is, what happens once Biden can begin enacting changes to tax policy?

“It’s really hard to predict anytime how Congress is going to respond in terms of tax policy; it’s particularly difficult to predict it this year,” said Howard Gleckman, a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. “But my sense is, it will be easier in the current political dynamic to get the tax cuts he talked about rather than the tax increases.”

The caveat is that the Biden administration has many things on its agenda before taxes — namely, the coronavirus pandemic and its vaccination rollout as well as shoring up the shaky economy and stabilizing the unequal jobs recovery.

“We’re not going to see any massive tax changes because there are more pressing things to worry about at this point,” said Brian Glavotsky, a tax partner in family office services at Wiss & Co., an accounting firm.

Other analysts suggested that if the pandemic looked better by the end of the summer, tax changes might be addressed then.

With that in mind, perhaps the best way to consider what to do in 2021 is to think about what you need to do in the short, medium and long term.

The biggest potential long-term change involves the estate tax. But in contrast to previous changes, the tax code could be modified in a way that affects everyone who has something of value to leave to heirs.

For decades, assets were valued at the time of the owner’s death, even if the value had risen. This socalled step-up in basis rule works like this: If a stock that was bought for $1 is worth $10 when the owner dies, the gain is $9. But when that asset is passed on to heirs, the embedded gain is wiped out because the base value is now $10 and no capital gains tax is owed.

This treatment applies to any asset, from liquid securities and private investment partnerships to a family home. If the total value of the estate is less than the current $11.7 million exemption level for an individual or $23.4 million for a couple, then no estate tax would need to be paid either.

A Biden administration may move to change this for logical and revenue reasons. At one point, the stepup in basis made sense. Imagine trying to determine the capital gains from AT&T stock that your grandmother bought in 1943 when record-keeping was done with a pencil and paper. Today, cost-basis information can be retrieved in seconds.

But two different groups of people have raised concerns about losing the stepup loophole: the very wealthy and the moderately wealthy.

If you are Jeff Bezos or Elon Musk, the two richest people in the world, having your long-term holdings in Amazon and Tesla given a step-up in basis is a huge savings on capital gains tax, because they are going to be paying estate tax regardless.

But for people of more modest wealth — say, someone lucky enough to inherit a home or a stock portfolio — the loss of stepup could be even more significant.