Worrying about the right thing with property taxes

Death and taxes may be the only certainties in life, but taxes on death are only a distant possibility for most people. The vast majority of Americans will never owe or give enough to owe estate or gift taxes.

Many more people could be affected if a tax break enjoyed by heirs is removed. During his presidential campaign, Joe Biden proposed scrapping the so-called “rise base” that allows people to minimize or avoid capital gains taxes on inherited assets. But no legislation has yet been proposed, and such a change could struggle to pass a divided Congress.

“Right now, we’re telling people to start thinking about it, but we’re not rushing to act,” says Certified Financial Planner Colleen Carcone, Director of Wealth Planning Strategies at TIAA.

How increasing the base reduces taxes

Although most estates do not owe inheritance taxes, anyone who has inherited a home, stock or other property has likely benefited from the progressive tax relief that gives those assets new value at death of the owner.

Say your savvy aunt paid $7,000 for a single Berkshire Hathaway stock in 1990. That’s her tax base. If she sold the stock at its closing price of $362,000 on February 10, she would have to pay tax on the gain of $355,000. If she generously gave you the stock and you sold it on February 10, you will owe the same amount of tax because you will also get her tax base.

Now let’s say that instead of giving you the stock, she left it to you in her will and she died on February 10th. The stock would get a new tax base of $362,000. Any gains made during his lifetime would never be taxed. If you sold the stock later, you would only have to pay tax on the gain realized since his death.

Certain types of inheritance, such as annuities or retirement accounts, are not increased. But it’s no exaggeration to say that many more people benefit from our inheritance tax system – by inheriting homes and other assets with an increased tax base – than people who have to pay taxes on estates. estates.

Who pays gift and inheritance tax now

This year, an estate must be worth more than $11.7 million to trigger federal estate taxes. According to the Urban-Brookings Center for Tax Policy, less than 0.1% of people who died in the United States last year are expected to leave estates large enough to owe taxes.

People who have to pay gift tax are also quite rare. There is an annual exclusion, or an amount that you can give to as many people as you want each year without having to file a donation return. The exclusion limit is $15,000 for 2021 – you can give up to $15,000 each to an unlimited number of people without having to declare the gifts. Although you must file a gift tax return, you should not pay gift tax as long as the amount you gave during your lifetime – in addition to the annual exclusion amounts – is over $11.7 million.

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These historically high caps are set to end in 2025, meaning that in 2026 the estate and gift tax exemption caps would be $5 million per person, adjusted for inflation. Biden wants the exemption to drop to $3.5 million per person.

People in some states already face lower limits. The 12 states that impose their own estate taxes – Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington – and the District of Columbia have lower exemption limits those of the federal government. Massachusetts and Oregon have the lowest exemption amounts, $1 million.

Six states – Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania – also levy taxes on people who inherit. Different tax rates and exemption limits apply depending on the relationship between the heir and the deceased. Immediate family members usually pay the least or nothing at all, while distant relatives and unrelated people pay more.

What you should do now: Keep good records

The idea of ​​eliminating base raising has been proposed in the past, but it has met with headwinds in part because the practice benefits a wide range of voters.

Since there is no concrete proposal to change the stage, there is not much people can do to prepare for the change other than what they should do anyway, that’s i.e. keeping careful records. This means “following the baseline” of what they have paid for all assets as part of routine estate planning.

If you buy shares of a stock in a taxable account, for example, hang on to records showing those purchases. The cost of any improvements you make to a home or other property can also increase its tax base and potentially reduce taxes later.

“The one thing we think people should start doing today is really start thinking about record keeping,” Carcone says.

This article was written by NerdWallet and was originally published by Associated Press.

Liz Weston is a columnist at NerdWallet. She is a Certified Financial Planner and author of five money books, including Your Credit Score. Read more

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