Property taxes could hit the less wealthy

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Democratic presidential candidates Elizabeth Warren and Bernie Sanders have unveiled ambitious plans to fund universal health care and other programs by raising taxes for the wealthiest Americans. But behind the proposed tax hikes for the super rich are measures that could affect a wider range of taxpayers.

Warren and Sanders both want to reduce the amount of assets exempt from federal property taxes – $ 11.58 million per person in 2020 – to $ 3.5 million. Sanders also proposed to increase the estate tax rate, which now caps at 40%, to 45 to 77%, depending on the size of the estate.

If either candidate is elected president, “there will be strong pressure to raise property taxes by raising rates or lowering exemptions or both,” said Howard Gleckman, senior researcher at Urban- Brookings Tax Policy Center.

Democratic presidential candidates have also expressed interest in reducing or removing a provision in the tax code that benefits heirs who inherit assets that have appreciated in value. Now, when you inherit securities or other assets, the cost base of those assets is “raised” to their value on the date of death of the original owner. If you turn around and sell the securities, you will not owe any capital gains, even if they have increased in value considerably since purchasing them. Former Vice President Joe Biden has proposed removing the increase to help pay for his higher education initiatives.

Presidential candidates – and future presidents – who want to increase property tax revenues face strong headwinds. While the idea of ​​a plutocratic wealth tax has a lot of support, inheritance taxes are largely unpopular, even among people who will never have to pay them, says Joseph Thorndike, director of the Tax History Project. at Tax Analysts, which publishes information for tax professionals. A lot of people think it’s fundamentally unfair to tax inherited wealth, he says. “Lowering the exemption could exacerbate the problem of the tax’s unpopularity.”

The clock is turning. Regardless of who is elected president, the generous threshold of federal inheritance tax lives on borrowed time. Under the sunset provisions of the 2017 tax overhaul, the current exemption is expected to drop to around $ 5.5 million in 2026, unless Congress decides to increase it.

Ryan Losi, a certified public accountant at Piascik in Glen Allen, Va., Says he advises clients with estates above this threshold to start planning now. “November will be an indicator as to whether it falls earlier than sunset,” he says.

If you’re worried that lower exemptions might reduce the amount you’ll leave to your heirs, there are plenty of ways to avoid inheritance taxes. The simplest strategy is to donate assets while you are still alive. In 2020, you can give $ 15,000 to as many people as you want without filing a federal income tax return. As long as your donations remain under the limit, they will not affect your exemption from federal estate taxes.

If you have a significant amount of stocks or appreciated mutual funds in taxable accounts, you can reduce the size of your estate and lower your current tax bill by donating the securities to charity. If you have owned the securities for at least one year, you can deduct the fair market value of the securities when you donate them. You won’t have to pay capital gains tax, and neither will the charity. If you’re not sure which charities you want to support, a Donor Advised Fund is a tax-efficient way to make regular donations to your favorite causes. These funds, offered by Schwab, Fidelity, Vanguard and other financial companies, allow you to make a large deductible contribution in a year and decide how to distribute the money later.

State property taxes. These strategies could also help you avoid state property taxes. Eighteen states have an inheritance or inheritance tax – which is paid by the heirs rather than the estate – and in some of those states the threshold is much lower than the federal exemption.

Oregon and Massachusetts tax areas valued at $ 1 million or more, with a top tax rate of 16%. Rhode Island taxes estates valued at $ 1.56 million or more, at rates ranging from 0.8% to 16%. Washington taxes estates valued at $ 2.2 million or more at a maximum rate of 20%. (For more information on estate and other state taxes that affect retirees, see the Kiplinger Retiree Tax Card.)

President Donald Trump recently changed his residence from New York, which taxes estates valued at $ 5.74 million or more, to Florida, which has no inheritance tax (and no estate tax). income either). Other wealthy people have made a similar gesture. A recent study published by the National Bureau of Economic Research found that as wealthy people age, they are less likely to live in a state with an inheritance tax.

Some states have sought to stem migration by gradually increasing the amount of assets exempt from inheritance tax. But don’t try to get states to completely abandon their inheritance taxes. The NBER study also found that the loss of income of people who moved to other states was more than offset by the income from inheritance taxes of wealthy residents who stayed behind.


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