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What the Biden Administration May Mean for Taxes

And when we should expect any changes.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Should investors be bracing themselves for tax changes? Joining me to discuss that topic is tax and retirement expert, Ed Slott. He is author of a new book called "The New Retirement Savings Time Bomb."

Ed, thanks for being here.

Ed Slott: Thank you for having me back to talk taxes, my favorite.

Benz: It's great to have you here. There's been a lot of discussion about whether a new presidential administration and a new Congress will bring about major changes to the tax code. So, just as a general stage-setter, how would you suggest that people approach this? Should they just kind of wait and see? Is there any need ever to make changes preemptively based on tax changes that we think might be coming down the pike?

Slott: I don't--just upfront--I don't have any inside information. So, I don't know anything that other people don't know. Everything is speculative. But you know what? I've got a lot of these questions leading up to the election. What if this? What if that? And I have to remind people: For a lot of the things, you can control your own tax rate. For things like a Roth conversion, you know, I wouldn't wait around. I think taxes will go up, maybe not this year. It seems to me, my opinion again, that they have a lot of other priorities right now, doing sort of like financial triage, and they are prioritizing what things they have to take care of. I think taxes will come maybe later in the year, maybe not even this year. And the later they go into the year, the less likely it is that anything will be retroactive back to Jan. 1.

So, you have the window of opportunity now. We know what tax rates are now in 2021, and they are the lowest tax rates--just like we've been seeing the last few years--you may ever see in your lifetime. So, I would take advantage of those rates. But the odds are, most people won't see their taxes go down given our deficit and debt levels. So, higher-income people might see taxes increase. So, that's why I mentioned something like a Roth conversion. You can control that now. I would look at those low brackets and take advantage of getting some of that IRA money out now, because that's just a growing, building, unpaid compounding debt in your IRA. And if rates go up over the long term, which is likely, it will cost you more later. This is an ideal time, I think, to do a Roth conversion. And the things that I like about a Roth conversion is, even if I'm wrong and rates don't go up or they even go down, which I doubt, the great part about the Roth conversion: The worst-case scenario is you have a 0% tax rate. You've locked in a 0% tax rate on those funds for life. That's not a bad consolation prize. You can't beat a 0% rate. So, those are some things you can do to take advantage of today's rates, which we know are here now for 2021.

Benz: Right. I wanted to ask about capital gains. That's been another area of interest, whether we'll see that tax bracket for high-income folks for capital gains go up. When you think about that, I'd like your perspective on the likelihood of that, and I know you don't want to just guess randomly, but you can share your perspective and then also discuss any strategies that might make sense for people who potentially could be facing higher capital gains taxes in the future.

Slott: That's something that might happen. But again, I don't think they're going to get to it till later in the year for the reasons I said before. And I don't think you're going to see, even if they get to it, anything outrageous, because remember, you have a 50-50 Senate. Anything extreme I don't think is going to pass. So, it will have to be middle of the road. They will probably trim around the edges. There's thinking that maybe the capital gains rate will go up a little. Remember, back in the '80s, I believe, there were two or three years where the capital gains rate was the same as the ordinary income tax rate. That's something that might happen. And if you're worried about that, well then maybe sell some items now. But I really wouldn't overreact this year. I don't think anything like that is going to happen this year unless you have like really big items, a big property sale or something, and you want to lock in today's low capital gain rates. I don't think you'll see a lot of extreme movement on that. It may pop up a few points, and they may try to make it even to the ordinary income rates. But even that I think is too much to push through a 50-50 Senate at this point.

Benz: How about estate tax changes? There have been a couple of thoughts there that perhaps the exclusion amount would go lower than it is today. It's very, very high today. So, let's start there. I'd like your perspective on how people should be thinking about that.

Slott: I think that is something that may come down. Remember, the exemption we have now is almost $12 million a person. Actually, for '21, the estate and gift exemption--$11.7 million, $23.4 million for married couples. So, I think you could see some of that coming back down. It's supposed to go back down to half after 2025 anyway. You could see some movement on that. Again, I don't think you'll see it this year because it will be too far into the year to make it retroactive. But maybe if you're thinking ahead, if you have an estate that you feel with changes in that exemption could be subject to estate tax, maybe you want to look at doing some gifting now and taking advantage of tax-exempt gifting besides just the $15,000 annual exclusion gifts. You can use the exemption during your lifetime. You could use that $11 million or $23 million during a lifetime and lock it in. And the good part about doing that, let's say, you use the whole $11 million. You have a lot of money. You use the whole $11 million. And then, it turns out they drop it to $5 million. You get to keep that $11 million. IRS already ruled on this a couple of years ago that they won't claw it back. That may be an opportunity to lock in that $11.7 million exemption by using gifts. You won't have to give it back. So, that's something you can do.

The other item on the estate front ties in again with capital gains is talk about undoing the step-up in basis. I think that one is a bridge too far. That's extreme. And I did some research on this. Did you know this year, 2021, is the 100th year anniversary of step-up in basis in 1921? And I saw some articles come out, and this has come up year after year--anytime there was a major event--and they had the same exact argument, and nothing ever happened with it. I think that's too extreme. Too much of a shock to the system. It would affect too many, even just regular homeowners who bought a home 40 years ago. Now they have all this appreciation, unless they put a large exemption in there. I think that's too much to push through this year, again, with a 50-50 Senate, and I think that's too much of a lift. I don't see a step-up in basis going away. My opinion. I could be wrong.

Not to mention that would be quite a recordkeeping crisis for people.

Slott: Oh, can you imagine? That's one of the best things of step-up in basis. You don't have to worry what Grandma Moses paid for that house, that cabin, in the 1800s. Now, you get the date of death value. Yes, it would be--that's a great point--it would be a recordkeeping nightmare. You'd have to go back to the original owner, find the cost, all the improvements, all the additions to basis. It would be a nightmare. I don't think you'll see that happen.

Benz: Ed, it's always great to get your perspective. Thank you so much for being here.

Slott: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.