President Biden Proposes Significant Tax Increase for Capital Gains

President Biden’s administration recently released his vision for taxing long-term capital gains.  In short, he believes that people with higher income and/or large appreciation in investment assets do not deserve preferential tax treatment during life or at death.

Currently, investments held over one year are taxed at a maximum rate of 20% (23.8% with the net investment income tax) when they are sold.  If you die owning such investments, the beneficiaries receive a “step-up” in basis equal to the fair market value of the investment, and there is no income tax paid on the appreciation.

Under Biden’s proposed change, taxpayers with adjusted gross income of more than $1 million would pay tax on their long-term capital gains at ordinary tax rates, meaning the tax would be 37%, or 40.8% including the net investment income tax.  This would be applicable to gains recognized after late April 2021.

There is almost no escaping this tax by gift or at death.  At death, the decedent’s estate would have to pay ordinary income tax on the difference between the decedent’s tax basis and the fair market value at death.  The same would apply to gifts.  The recipient of the investment would have a basis equal to the fair market value at the time of transfer. This would apply to transfers made and to decedents dying after December 31, 2021.

Lifetime Income Exclusion

Some exceptions to this rule would exist.  For instance, each taxpayer would receive a $1 million lifetime exclusion for investments transferred during life or at death.  Tangible personal property would not be taxed, but a principal residence would be taxed if the gain exceeds the current $250,000/$500,000 principal residence exclusion.  Also, gifts of appreciated property to charities would not be taxed, as under current law.

Estates would have up to fifteen years to pay the tax, and the IRS could require security for the deferral.

As this article is written in early June 2021, this proposal has not become law.  It may never become law, but it is something to bear in mind for those taxpayers who potentially could be affected.  If you find yourself in this situation, your tax advisor at DWD can help you plan to mitigate the effect of these proposed rules.

Contributed By: Mark Westerhausen, CPA | DWD CPAs & Advisors