The New Death Tax In The Biden Tax Proposal: Major Tax Change

They’re touted as the only certainties…but proposed changes to inherited asset taxes will almost surely result in paying more and inheriting less.
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The proposed transition from ‘Step-up’ to ‘Carryover’ basis in President Biden’s tax overhaul proposal is a crucial and contentious element that would cost families billions of dollars in higher taxes. Furthermore, death and gift would be considered transactions, resulting in hefty tax obligations for heirs. These seemingly insignificant modifications would add up to massive changes and greater government income. The current set of rules. The existing guidelines allow for a step-up in basis in the event of death. If a person possesses an asset that has risen in value, the property’s basis is increased to the fair market value at the time of death. So, if Tina holds a $2.2 million stock portfolio that she purchased for a total of $200,000 over the years since 1970, and she passes the portfolio to her children, they will inherit the portfolio at a basis of $2.2 million. They would not have to pay capital gains taxes if they sold it for $2.2 million. They would have a $300,000 long-term gain if they sold it for $2.5 million more than a year later, which would be taxed at preferential rates.
On a rolling basis. The proposed rule would require the heirs to assume, or ‘carry-over,’ the decedent’s basis. Furthermore, the proposed rule would turn death into a business transaction. As a result, the heirs would have a basis of $200,000 in the case above. They’d also have to pay capital gains taxes on a $2 million profit. Worse, if this gain increased their Adjusted Gross Income above $1 million, they would be subject to regular income tax rates on the capital gain as well as the Net Investment Income Tax, for a total tax rate of 43.4 percent. Under the proposed rule, the cost ranges from zero on a step-up basis to $868,000 on a carryover basis.
Things are just going to get worse. State income taxes are not included in the instances above. The money would constitute taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gain return, according to the Treasury’s ‘Green Book.’ This leaves open the possibility of state income or inheritance taxes. Furthermore, the estate tax is glaringly absent from the Green Book. As a result, there would be two or possibly three types of death taxes: federal capital gains, state capital gains, and federal estate taxes.
Exceptions. There are a few exceptions to the capital gain requirements under the proposed rule: The exclusion for the principal residence would remain at $500,000 ($250,000 for singles).
EVEN MORE FOR YOU. Exceptions for small businesses (such as section 1202) might apply. A single person would be exempt up to $1 million, and a couple would be exempt up to $2 million. Transfers to a spouse or a charity are tax-free. Certain family-owned and operated enterprises would not be subject to taxation until they were sold or ceased to exist. This can be a disaster for an admired business that later goes out of business because it looks that taxes are still owing. For assets other than liquid assets, the proposal also includes a 15-year fixed rate payment plan.
The date on which the policy becomes effective. The proposed carryover basis regulations go into effect on 12/31/21 for transfers made after that date. The proposed increase in ordinary income capital gains rates is retroactive to April 28, 2021 (perhaps 05/28/21 if we apply the date of the Green Book).
What does this imply? This is a significant shift in tax policy that might have a significant impact on families with appreciated assets. This measure, which is aimed at multimillionaires and billionaires, levies a new death tax on many families who have long-term interests. By the end of 2020, an investor who bought Best Buy (BBY) in 1990 would have made a gain of nearly 108,000 percent. From 1990 to 2020, boring Kansas City Southern (KSU) increased by 78,000 percent. Furthermore, this tax is in addition to the estate tax. Americans may now be subjected to a slew of new death levies. This will create a requirement for a diverse set of planning strategies to address these new difficulties. Donations to charitable organizations appear to be exempt from the proposal, so keep that in mind. If the proposal is approved, the carryover basis will begin in 2021, which could result in a lot of year-end gain harvesting. Furthermore, many families will most likely obtain insurance to cover capital gains taxes, most likely a second-to-die policy.
The Bottom Line Keep an eye out for updates. Any tax proposal will very certainly be stuffed into a reconciliation bill, which only needs a 51-50 Senate vote to pass (that would be 50-50 tie with the deciding vote cast by Vice President Harris). Because this is a narrow passageway, a lot can happen. In the meantime, start making a plan to deal with the “what ifs.” I’ll do my best to respond to questions by e-mail: llabreque@sequoia-financial.com./nRead More