Mitigating the Tax Effects of Biden’s Capital Gains Tax Proposal

Due to the proposed tax increases by the Biden administration, estate planners, CPAs and financial advisors, are searching for ways to avoid the potential hit from higher taxes on both investment income and the proposed capital gains taxes at death.  

Biden’s proposal features two related components that could generate more than $300 billion over 10 years.  The first component is the capital gains rate increase on income over $1 million.  The second component would affect the way capital gains are treated at death.

Raising The Top Tax Rate

The President’s tax plan would raise the top ordinary tax rate from 37% to 39.6%.  For taxpayers with income over $1 million, Biden has proposed raising the top capital gains rate to 39.6% as well.  And when the Net Investment Income Tax (NIIT) is added in, this rate jumps to 43.4%.  

Taxing Appreciated Assets at Death

In addition, Second, Biden’s proposal calls for taxing appreciated assets at death as if they were sold at Fair Market Value (FMV).  The proposal would eliminate the existing tax break that allows appreciated assets to pass to heirs tax-free.  The beneficiaries of appreciated assets would no longer receive the FMV “step-up” in basis upon death.

Retroactive Clause May Impact Planning

The capital gains rate increase may be retroactive to the “date of announcement,” making it tough for taxpayers to prepare. Taxpayers with significant gains may choose to wait to sell their investments, while others may choose to gift appreciated property to reduce the tax burden. 

The current gift and estate tax exemption is $11.7 million per person.  Acting now involves using any available exemption to get assets to heirs and trusts this year without paying any gift taxes.  Gifting appreciated assets this year wouldn’t trigger any capital gains taxes; however, doing so next year could result in taxation equivalent to a sale.

It Ain’t Over ‘Til It’s Over

What will Congress do?  That remains is the billion-dollar question.  President Biden would need the votes from every Senate Democrat and nearly every House Democrat to raise taxes on the wealthiest Americans. As of this writing there are some Democrats already expressing reservations about the proposal.  Passage of the Biden tax plan is not certain.  And even if it does pass, some sections of the President’s current proposal may be altered.  For this reason the tax consultants at Mahoney are keeping a close eye on developments in tax reform.  

For additional considerations, please reach out to Kari M. Erickson, CPA, MST, Director, or contact our Tax Solutions team at Mahoney to be of help to you in any way.