by Stephen Reed | 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.
by Daniel Kittell | 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%.
by Daniel Kittell | Accounting News, COVID-19, News, Relief Bill, Stimulus, Stimulus Package
The American Rescue Plan Act of 2021 was signed into law by President Biden on March 11, 2021. Intended to facilitate the United States’ recovery from the devastating economic and health effects of the COVID-19 pandemic, this economic rescue legislation is one of the most expensive in U.S. history. Below is a broad overview of some of the larger components of the package.
Direct Financial Payments
Direct stimulus payments in the amount of $1,400 will be sent to individuals with an adjusted gross income (AGI) of $75,000 or less. This amount augments the $600 payments in the second stimulus package signed by former president Trump in December of 2020 in order to hit the $2,000 mark originally requested by Trump. Married couples with AGIs of $150,000 or less will receive $2,800 ($1,400 for each), and each qualified dependent regardless of age will receive $1,400. Payments are reduced for individuals who make over $75,000 and disappear completely for individuals who make $80,000 or more ($160,000 for married couples).
Extended Unemployment Benefits
Pandemic Unemployment Assistance (PUA) benefits of $300 a week are extended through September 6, 2021. These benefits were created for workers such as independent contractors, who do not typically qualify for unemployment insurance. The total number of eligibility weeks increases as well, from 50 to 79.
Federal Pandemic Unemployment Compensation (FPUC) benefits, which boost unemployment benefits by $300 per week, are also extended through September 6, 2021.
Pandemic Emergency Unemployment Compensation (PEUC), which provides added weeks of unemployment insurance benefits to workers who have depleted their state unemployment benefits, has been extended through September 6, 2021. The total number of eligibility weeks also increases from 24 to 53 weeks.
Additionally, the first $10,200 in 2020 benefits is tax free for families making $150,000 or less. Taxpayers who had taxes withheld from unemployment benefits in 2020 will be authorized to reclaim them when they file their 2020 taxes. If they’ve already filed taxes, they can file an amended tax return.
The Act also grants a 100% subsidy of COBRA health insurance premiums so unemployed and furloughed workers, as well as those who’ve had hours reduced, can continue their group health care plans through the end of September.
Expanded Child Tax Credit
For couples who make $150,00 or less in a year ($112,500 or less for single parents), the Act increases the Child Tax Credit maximum to $3,600 a year for each child under age 6, and $3,000 a year for each child ages 6 to 17. The law grants one year of credit payments, which will be sent by direct deposit on a monthly basis, possibly beginning this summer. The remaining amount can be claimed on 2021 tax returns.
Employer Tax Credits
The Act extends tax credits to employers who implement Families First Coronavirus Response Act (FFCRA) emergency paid sick leave or expanded family and medical leave to employees. In addition to previously acceptable FFCRA reasons for sick leave, from April 1, 2021 through September 30, 2021, credits are also available for sick leave wages paid when an “employee has been exposed to COVID-19 or the employee’s employer has requested such test or diagnosis, or the employee is obtaining immunization related to COVID-19 or recovering from injury, disability, illness, or condition related to such immunization.” Too, tax credits for emergency paid family leave are permissible for leave granted when an employee is incapable of working, either in person or remotely, due to the necessity of caring for a child whose school is closed at any point during the pandemic.
Help for Businesses
The “Restaurant Revitalization Fund” is a new program established under the American Rescue Plan Act that allocates $25 billion in pandemic assistance grants to eligible entities such as restaurants, bars, lounges, and caterers. The grants are able to administer up to $10 million per company with a limit of $5 million per physical location. The funds can be used to cover payroll, rent, utilities, and other expenses.
Two programs established under the CARES Act receive additional funding. The Economic Injury Disaster Loan (EIDL) program receives an added $15 billion, and the Paycheck Protection Program receives an added $7.25 billion. The PPP’s current application deadline of March 31, 2021, is not extended.
