Biden Raising Taxes? | How Estate Planning & Your Inheritance Might be Impacted
As the famous saying goes, "Nothing is certain except death and taxes," and being an estate planning attorney, it seems as though my every day is helping my clients plan for both of these certainties.
This post will mainly be discussing that last one - taxes. A few weeks ago, President Joe Biden released his 2023 federal budget. Among the proposals was a tax hike on the top marginal income tax rate to 39.6% from 37%. This would apply to married couple filing jointly with taxable income over $450,000, heads of households above $425,000, single filers making more than $400,000 and $225,00 for married taxpayers filing separately. If this budget were to be enacted, the increase tax rate would impact higher earners beginning January 1, 2023, and income thresholds may adjust for inflation after 2023.
Most of our clients aren't receiving this kind of money each year as this isn't a change that will impact most people. However, that has raised the question by a few of our trust administration clients who are set to receive significant sums of money from an inheritance - What happens to them in the year they receive that inheritance from a tax standpoint? We tell them they don't have much to worry about here for a couple of reasons.
Firstly, and most importantly, this proposed increase is only on income tax. In the realm of inheritances, we need to worry about estate taxes. Even if you were set to receive $1,000,000 next year as an inheritance, this rate increase wouldn't impact you. Your inheritance, at least federally, is not income to you. The instances you would need to worry about for taxes and inheritances would be on the income produced by the estate (either trust or probate) between date of death and distribution, even if you were to inherit something like an IRA or 401(k) (which operate under their own rules).
Even then, this estate income is typically relatively low based on average timeframes to wrap up an estate, and the impact can typically be shared among the beneficiaries individually, rather than the trust itself. This often leads to a lower overall tax burden as trust tax rates are less flexible than our individual tax rates.
The key takeaway is that your inheritance will not jolt you into a sudden tax bracket jump but you should speak to your financial adviser or CPA about any IRAs or 401(k)s you inherit.
Next, the other reason we are telling our clients not to worry about this budget proposal as a whole is just that - it's only a proposal. Congress needs to act in order to make changes to the tax code, such as with the Trump tax cuts, the 2017 Tax Cuts and Jobs Act. In Washington, presidential budget proposals are more often seen as "signaling messages" rather than strictly proposed legislation - that is, more of a banner of ideas to rally one's voters around - and typically are not enacted by Congress as proposed.
Add to this consideration Biden's relatively low approval numbers and the looming threat of the Democrats losing the House and/or Senate in the midterm elections next year, and you have recipe for a Congress not daring to touch taxes either this year or next.
One final point we would like to leave you with though - that of planning fatigue when it comes to finances, taxes and one's estate. With the current political climate and these various tax proposals (remember that lowering the estate tax threshold was a consideration when Biden was pushing Build Back Better) it may seem a bit overwhelming to try to plan around seemingly ever shifting sands. However, this perceived uncertainty is not new and something experienced planners, like your estate planning attorney, should know how to anticipate and have proper safety nets in place to plan around. However, planning fatigue and safety nets in estate planning are topics we'll discuss in their own dedicated posts.
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