Somewhere in the middle of the pandemic, the United States had a presidential election, swore in a new president and had a shift in the politics of Congress. Now that a COVID-19 vaccine has been developed and life is returning to normal, Congress is back to work and introducing bills that may have a significant effect on seniors and their families. Given the current ability to pass legislation during the reconciliation process, it’s wise to remain diligent about what may be coming.
Tax
While minor tweaks have been made in tax policy since the Internal Revenue Code of 1986, things remained largely unchanged until the Tax Cuts and Jobs Act (TCJA) was passed in
December 2017. However, when the TCJA was passed, the Republican majority didn’t obtain enough votes to make the TCJA permanent. Thus, while there were sweeping changes to tax policy, these changes are set to sunset in 2026. On April 28, 2021, President Joe Biden introduced his American Families Plan (AFP), which contains the Biden administration’s answer to the TCJA. While much of the AFP centers around corporate taxation and tax credits for low income families, there are several provisions of which seniors should be aware. While the AFP has yet to pass, it’s widely speculated that much of it will become law.
Income tax changes. Of concern to almost everyone in the United States is how the AFP will affect income tax rates. The AFP proposes an increase in the highest marginal tax rate from 37% to 39.6% beginning in 2022. The highest rate would apply to single taxpayers with income exceeding $452,700 and married joint filers with income exceeding $509,300. However, the AFP is silent on the remaining income tax brackets and whether there would be any adjustment to those tax rates.
In addition to the change in the tax rate, and perhaps the change that’s most concerning to seniors, is a proposed increase in the capital gains tax rate. Currently, long-term capital gains are taxed at a rate of 10%, 15% or 20% depending on other income. However, the proposal would change capital gains to be taxed at ordinary income tax rates. Effectively, this means that capital gains would be taxed at 43.4% because they would be subject to the highest tax rate of 39.6% plus the net investment income tax of 3.8%. As proposed, this would only apply to taxpayers with income of $1 million. Therefore, seniors who are forced to liquidate securities or appreciated assets such as long-term real estate holdings to pay for expenses may be subject to significantly more tax than before.
Finally of note with respect to income tax is that the AFP contains no provisions that would allow the return of miscellaneous itemized deductions. Therefore, the vast majority of seniors take the standard deduction; however, for those who still itemize, the state and local tax deduction will remain limited to $10,000, which negatively impacts seniors living in high tax states.
Estate tax. The current estate and gift tax unified credit allows a taxpayer to pass $11.7 million of property to heirs without paying an estate tax. In addition, the spouse of a deceased taxpayer can file an estate tax return and elect to have any unused estate tax credit transferred to themself, thus allowing married couples to pass up to $23.4 million in assets without paying an estate tax. Also, beneficiaries receive inherited property with a step-up in basis, meaning that their basis for capital gains tax purposes is the fair market value (FMV) of the inherited asset as of the time of the decedent’s date of death. The high estate and gift tax exemption means that very few taxpayers are subject to such tax, and the step-up in basis means beneficiaries often pay little to no tax on inherited property. For a number of years, estate planners have speculated that the estate tax exemption would decrease, and tax proposals discussed during the most recent presidential election campaigns suggested a possible reduction in the estate and gift tax exemption to as little as $3.5 million per individual. This would result in a much larger percentage of the population being subject to estate and gift taxes.
Luckily for many, the AFP doesn’t include a reduction in the estate and gift tax exemption but instead the proposal treats death as a realization event for appreciated assets. A realization event means that, even though assets aren’t being sold, the estate is treated as having sold a decedent’s assets and thus would require a decedent’s estate to pay capital gains on the difference between the FMV of the decedent’s assets on the decedent’s date of death and the decedent’s basis. The AFP also requires realization if the assets are gifted during an individual’s lifetime.
A surviving spouse would no longer receive a step-up in basis on assets inherited from their spouse. Instead, a spouse would receive carryover basis and would be subject to paying the capital gains tax if they gift the property during their lifetime or at their death. The AFP proposes a $1 million exclusion per taxpayer that can be transferred to a surviving spouse, thus allowing an exclusion of up to $2 million in capital gains. In addition, taxes on appreciation of family-owned businesses and certain other non-liquid assets could be stretched over a 10- or 15-year period.
Unfortunately, there’s no guidance as to what the capital gains rate will be at death nor does the AFP include any discussion as to whether this tax would apply to capital gains held inside a qualified retirement plan. This capital gains tax at death is in addition to any potential estate tax. While some are relieved that there appears to be no change in the estate tax exemption, the capital gains at death would subject a large number of individuals to tax in ways never expected.
Like-kind exchange. In a similar vein to the discussion regarding death as a realization event, the AFP limits the deferral of gains from a like-kind exchange to $500,000 per taxpayer per year. Thus, a like-kind exchange, which would normally result in tax deferral, would be subject to capital gains tax.
Audits. Finally, the AFP includes additional funding for the Internal Revenue Service so that it may increase the number and frequency of audits of both individual and business taxpayers with the idea that increased vigilance will increase compliance and increase revenue for the Treasury.
SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in December 2019, drastically changes how qualified retirement funds are taxed after passing from the account owner to a beneficiary. While it’s been the law for over a year now, many are still unaware of its passage or the possible ramifications. With the SECURE Act, minimum distributions are no longer required until the account owner reaches the age of 72 (an increase from 70½). In addition, taxpayers over the age of 70½ who are still working can contribute to an individual retirement account. However, unlike before the passage of the SECURE Act, there are limitations to passing qualified retirement plans to beneficiaries. While a surviving spouse can continue to stretch distributions from their retirement accounts for their lifetimes, with a few exceptions, any other beneficiaries will have to withdraw all funds from qualified retirement plans within 10 years after the date of death of the account holder. That means that ordinary income tax on qualified retirement plans will be vastly accelerated, and leaving qualified retirement plans to beneficiaries other than a spouse is no longer as attractive as it once was. It’s also unclear from the AFP how any estate tax revisions would impact the transfer of qualified retirement accounts. Presumably, qualified retirement funds are still subject to the estate tax, if applicable, and the beneficiaries will pay income tax on the distributions.
Medicaid
While many seniors are concerned about income and estate taxes, many more are concerned with care for chronic illnesses, which become more prevalent as we age. This personal care and assistance is often called “long-term care” (LTC). Traditional Medicare and Medicare supplement plans don’t provide coverage for LTC services, thus requiring seniors to pay privately for their care. Unfortunately for many, LTC is costly, and their savings are quickly depleted when paying for care, leaving Medicaid as the only source of payment. Under current law, Medicaid must pay for care in a nursing facility if the patient meets the eligibility requirements; however, access to care at home through Medicaid is optional based on a state’s Medicaid plan, and many state plans that offer care in the community have eligibility criteria that’s nearly impossible to meet or have long waiting lists.
Better Care Better Jobs Act
The Better Care Better Jobs Act (the Act), introduced in the Senate on June 24, 2021, contains unprecedented funding for Medicaid programs that support access to care in a recipient’s community. This care, known as home and community-based services (HCBS), specifically includes caregivers who provide services to seniors in the community. The Act includes provisions to increase funding to states specifically for HCBS. In particular, the Act includes provisions to fund increases in wages for care providers and includes a wage adjustment for caregivers every two years. The Act also aims to provide support for family care givers by including respite care and paid leave time.
Also of significance is the requirement that each state require spouses who aren’t in need of care to be protected by making states pass eligibility requirements that authorize a spouse to maintain at least the community spouse resource allowance in the same way that’s allowed for care in a facility.
Ultimately, it’s likely that the plan will result in grants to each state for HCBS, and each state will be responsible for how the HCBS services will be provided. Yet the introduction of the Act with the specific changes aimed at HCBS significantly increases the likelihood that seniors will be able to access care in their community, and it’s certainly important to remain aware of possibilities.
Stay Tuned
As with any proposed legislation, it’s likely that the AFP and the Act will undergo a number of changes before they’re passed, if they’re ever passed. However, President Biden publicly stated on
June 24, 2021 that he won’t sign the bipartisan infrastructure bill without movement on the AFP or the Act. That, and the current political make-up, makes it likely that these will pass in some form or another. While it’s easy for seniors to ignore corporate tax discussions and child tax credits, it’s more likely than not that these proposed legislative changes will have an impact on the finances and care options for many seniors.