Are Changes to the Estate Tax Coming in 2021?

With Halloween and the election quickly approaching it is only fitting that we discuss two of the biggest fears for Americans in 2021 – death and taxes. Specifically, how will the results of the election shape the estate tax in 2021 and beyond.

Brief History of the Estate Tax

The estate tax has a long history dating back to the founding of the country, but the estate tax as we know it today wasn’t born until the passage of the Revenue Act of 1916. When it was first implemented the estate tax had an exclusion amount of $50,000 and a top tax rate of 10%. Fast forward to the late 1970’s and the exclusion amount barely increased (to $60,000) while the top tax rate skyrocketed to 77%. At that high watermark, roughly 7% of all estates had an estate tax liability.

Since then the estate tax has seen a steady decline, especially over the last decade, with less than .06% of estates being subject to the tax in 2018. The final blow came with the passage of the 2017 Tax Cuts and Jobs Act (TCJA) which roughly doubled the exclusion amount from $5.49 million to $11.18 million in 2018 ($22.36 million for married taxpayers). In 2020, the exclusion amount is $11.58 million ($23.16 million for married taxpayers).

Estate Tax in 2021 and Beyond

If Trump wins re-election or the Republicans retain control of the Senate, then there is no reason to believe there will be any major changes to the estate tax. However, if Joe Biden wins the election and the Democrats take the Senate and retain control of the House, then a partial rollback of the TCJA is likely to occur.

It is estimated that about 4,100 estate tax returns will be filed for people who die in 2020, of which only about 1,900 will pay any tax. Given the small amount of American’s impacted by this tax, it is not going to take much political capital to reduce the exclusion amount back to pre-TCJA levels.

Tax Planning Strategies

Even with a rollback of exclusions the estate tax is not projected to impact taxpayers with a few million dollars in assets. What a rollback in the estate tax may do is impact those taxpayers who are considering whether to up the $11.58 million exclusion before the end of the year (because any changes in 2021 may be retroactive to January 1, 2020).

For large estates that are well above the $11.58 million exclusion, the case for acting now is much clearer than for those whose net worth is hovering around the exclusion amount. But even those taxpayers may want to act now because asset values tend to grow over time and it is unclear if the exclusion amount, once reduced, will ever return to current levels given the growing national debt.

Business Valuations Before Year End

If you are planning to take advantage of current law this year and begin making gifts, then preparation is essential. While gifting publicly-traded stocks and bonds can be done by signing a few forms with your broker, gifting of private business interests is more complex because there is no clear market value of the business. Typically gifts of non-publicly-traded property are made only after valuations are prepared so the taxpayer knows how much they are gifting. These valuations take time to prepare and there may be a rush this election year in particular. Now is the best time to discuss estate and gift tax strategies with your advisor in order for taxpayers to execute on any strategy by year end.

For questions or further information, please
contact a member of Withum’s National Tax Services Group.

Authors: Daniel Mayo, JD, LLM, National Lead, Federal Tax Policy | Jeremias Ramos, CPA

2020 Election Tax Policy Resources

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