How Does Biden Plan to Change the Way the US Taxes Unrealized Capital Gains at Death?

How Does Biden Plan to Change the Way the US Taxes Unrealized Capital Gains at Death?

by | Accounting News, Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax

President Biden campaigned on a promise to accomplish his progressive agenda by never raising taxes on citizens making less than $400,000 annually. However, his recent proposal to tax unrealized capital gains at death may impact a broader group. Here’s what to know.

What Are Capital Gains?

A capital gain is the rise in the value of an asset over time. For example, if you buy stock for $50 and its value increases to $200, you have accumulated a capital gain of $150. If you were to sell that stock, the $150 gain is said to be “realized”, but if you were to hold onto it, the gain would be considered “unrealized”.

Biden’s Plan

Biden’s plan to levy a tax on unrealized appreciation of assets passed on at death would be done in a move that eliminates a tax-planning tactic known as a “step-up in basis”. The “step-up in basis” permits heirs to minimize taxes when they sell holdings they’ve inherited because current law dictates that any gains accrued during their lifetimes go tax-free. By taxing the unrealized gain at death, this loophole would be closed and heirs would get hit with taxes upon the transfer. This means that appreciated assets transferred at death would be subject to two taxes: a capital gains tax and an estate tax. While it’s possible that the capital gains tax could be deductible in calculating the estate tax, the total tax increase would be substantial for appreciated assets held at death.

Increasing the Capital Gains Tax

The capital gains tax under Biden’s plan would be more severe than the current framework. The plan would raise the total top rate on capital gains, currently 23.8% for most assets, to 40.8%. It would apply the same tax to unrealized capital gains at death, exempting the first $1 million ($2 million for a married couple) plus $250,000 for a personal residence.

Exceptions and Special Rules

  • As noted above, the first $1 million of unrealized gains ($2 million for married couples) would be exempt, as would gains on a personal residence of up to $250,000 ($500,000 for a married couple).
  • Taxes on assets transferred to a spouse would be delayed until the surviving spouse dies or sells the inherited assets. Assets donated to charity would be exempt.
  • Personal property like household furnishings and personal effects (not including collectibles) would be exempt.
  • Some small business stock could be exempt.
  • Taxes would be deferred for most family-owned companies until the business is sold or no longer controlled by the family.
  • Assets held by trusts and partnerships would be subject to different rules.
  • Generally, the tax would pertain to those who die after December 31, 2021.

A Small Number of the Under-$400,000 Set Could be Affected

This plan could interfere with Biden’s oath to avoid increasing taxes on those with incomes below $400,000. Although most descendants will inherit estates far less than the $1 million threshold, there is a subset of citizens with large unrealized gains who live on relatively low incomes. Think of a retiree who depends on Social Security and various savings, but still holds decades-old high-earning stocks. Or consider a widow who has very little assets other than the house that has appreciated in value significantly during the years she’s lived there. If the “step-up in basis” is eliminated by the time an heir inherits the house, they may be subject to significant taxable gains.

What’s Included in President Biden’s Proposed Tax Overhaul?

What’s Included in President Biden’s Proposed Tax Overhaul?

by | Accounting News, News, Stimulus, Tax, Tax Planning - Individual

President Biden’s “Build Back Better” policy initiative, which targets economic recovery, includes a $1.8 trillion American Families Plan (AFP) and a $2.3 trillion American Jobs Plan. The administration plans to fund both initiatives through a Made in America Tax Plan. Below is an overview of what’s included in this far-reaching tax overhaul.

American Jobs Plan

Estimated to cost around $2.3 trillion over the next eight years, this part of Biden’s “Build Back Better” initiative would consist of clean energy projects; affordable housing; the reconstruction or repair of 20,000 miles of road and 10,000 bridges; as well as funding for those who provide care for the elderly and disabled, and direct investment in rural and tribal areas by equipping them with 100% broadband coverage.

American Families Plan

Estimated to cost over $1.8 trillion over the next ten years, the American Families Plan would include universal preschool; two years of free community college; paid family and medical leave; extensions of the Child Tax Credit, the Earned Income Credit, and the Child and Dependent Care Credit. It would also extend certain provisions set forth in the Biden administration’s economic stimulus bill, the American Rescue Plan.

Funding for the American Families Plan would come through a series of tax increases on high-income Americans, including: increasing the top individual income tax rate from 37% to 39.6%; taxing unrealized capital gains above $1 million at death; and adjusting the threshold for the 3.8% Medicare tax to all income above $400,000.

Made in America Tax Plan

The administration plans to pay for these initiatives with a “Made in America Tax Plan” over the next 15 years. It is estimated that the tax reform plan will raise over $2 trillion over the next decade and a half by increasing various taxes on American corporations, including:

  • Raising the corporate tax rate from 21% to 28%
  • Increasing the global minimum tax that multinational corporations must pay to 21%. This is much higher than the 12.5% minimum rate recently discussed by the Organization for Economic Cooperation and Development (OECD).
  • Intensifying tax enforcement of U.S. corporations that invert (relocate operations overseas) or claim tax havens
  • Imposing a 15% minimum tax on book income reported to investors.

Individual Tax Rates

The Biden administration’s proposals on individual taxation are intended to avoid increasing taxpayers with annual incomes less than $400,000. The plan aims to increase the tax rate for the top income bracket from the current 37% to 39.6%. The top rate on capital gains would nearly double, increasing from 20% to 39.6%. Further, the current net investment income surtax of 3.8% levied on high-income taxpayers presumably would still apply. This means that the new top federal tax rate on capital gains would total 43.4%, nearly double the current law top combined rate of 23.8%.