Potential Tax Law Changes That May Affect You
Recent news has focused on President Biden’s proposed budget for fiscal year 2022 and the Build Back Better Agenda. One goal of these proposals is to increase taxes on the top 1% of Americans, and as a result it is estimated that wealthier Americans will see a 13% to 18% increase in federal income taxes. There are numerous proposals in these plans, but we wanted to update you on the proposed changes to the capital gains tax and the Estate Taxes.
High Income Individual Changes
Increase the highest marginal rate for individuals to 39.6 percent.
For 2022, the new rate would affect married filing joint taxpayers with taxable income of more than $509,300; more than $452,700 for single taxpayers; more than $481,000 for heads of households; and more than $254,650 for married people filing separate.
Tax high-income individuals’ capital gains and qualified dividends at ordinary rates.
Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 Million would be taxed at ordinary income tax rates, with 39.6% being the proposed highest rate (43.4% including net investment income tax of 3.8%) but only to the extent that the taxpayer's income exceeds $1 Million ($500,000 for married filing separately). This new provision would be effective for gains required to be recognized after date of announcement (May 28, 2021).
Estate/Wealth Tax Changes
A reduction in the unified gift and estate tax exemption amount.
In 2021, the exemption is $11.7 million for an individual or an effective $23.4 million for married couples. Under current law, the exemption amount reverts to what it was in previous times, at approximately $6 million for an individual and $12 million for a married couple, beginning in 2026. President Biden has supported returning estate tax exemption amounts to 2009 levels, approximately $3.5 million per taxpayer. This could expand the impact of estate taxes to a much larger percentage of families.
Changes in the step-up in cost basis for inherited assets.
Laws have long been in place related to inherited assets, such as stock or real state that are passed on from one individual to another at death. Under current rules, the cost basis of an inherited asset is “stepped up” from the price initially paid by the deceased individual to the value at the time of that person’s death. So, an asset that was originally purchased for $10,000 that was valued at $25,000 at the time of the owner’s death would be considered to have a revised cost basis of $25,000 for the beneficiary. Proposals are being considered to eliminate this provision and require that the initial cost basis continue to apply, which could have significant tax consequences for those who stand to inherit assets. Alternatively, it is possible that any gain on the inherited asset could be taxed at higher, ordinary income tax rates instead of the more favorable long-term capital gains tax rate.
Treat transfers of appreciated property by gift or at death as realization events.
Donors and deceased owners of an appreciated asset would realize a capital gain when the asset is transferred (either as a gift or at the taxpayer’s death). Taxpayers would have a $1 million per-person exemption available (adjusted for inflation after 2022). Certain other exclusions would also be available.
Time will tell which of the Biden Administration’s proposals will ultimately become law. Stay tuned for updates from us as they become available. If you have any questions or would like to discuss further please reach out to us, we will be happy to help.