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The Biden Administration Plan for the Federal Estate Tax

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Have you been wondering what the Biden administration proposals for the federal estate tax would mean for you? If so, you may not be alone. The estate and gift tax rules can be complicated and there are many intricacies involved. The Biden administration has proposed two major changes. One is to raise the capital gains tax for people with an income of over $1 million annually. The second is to tax any unrealized capital gains at ordinary income tax rates when a person dies and his or her estate has to pay the tax, rather than allowing the current step-up basis at death. Let us discuss each proposed change in more detail.

Right now, the top tax rate on capital gains is 23.8%. This adds the top rate of 20% for high earners to a 3.8% surcharge. The administration proposes that capital gains tax rates for the highest earners, with an annual income of over $1 million, should match the ordinary income tax rate proposed of 39.6%. When added to the surcharge, the total top rate would be 43.4%.

At the present time the 23.8% rate applies to individual taxpayers with $445,850 of annual income or married taxpayers with $501,600 of annual income. If you fall somewhere in the middle of earning $500,000 to $1 million annually, your capital gains tax rate may be lower than the top proposed rate. The administration has yet to clarify all of the details. One element that is known is that a common strategy for passing down wealth and avoiding capital gains tax rates, by holding an asset until your death and allowing your heirs to receive it free of capital gains tax, is set to be eliminated as part of the second aspect of the proposal.

Another proposed change relates to the step-up basis. The step-up basis provision in the tax code allows an individual or couple to buy and hold an asset, then pass it on to their heirs at death, with the basis for potential capital gains for the person who inherits stepped-up to the market value of the asset at the time of the original owners’ death. The step-up basis means there is no tax on the appreciation in value that occurs over the years that the original owners hold an asset. The Biden administration proposes to simply get rid of this provision and apply regular long-term capital gains tax rates to the asset at the time the original owners die.

These proposed changes may have significant impacts on many. Take steps now to plan accordingly. Please reach out to our office to schedule an appointment.