President Biden has proposed major changes in the way the United States taxes the assets of those who have died. There is a lot of confusion about what he would do, in part due to the way the White House itself framed its proposals in an April. fact sheet. I will try to explain how the White House would and would not tax capital gains upon death.
In effect, Biden would tax the appreciated value of unsold assets held by some wealthy deceased after the owner’s death (or when the assets are given away for life). These unrealized gains would be taxed as if they had been sold upon death or when they were transferred.
The plan includes many exceptions and special rules:
· The first $ 1 million of unrealized gains ($ 2 million for a married couple) would be exempt from the new tax. The exemption would be indexed to inflation.
· Taxes on assets transferred to a spouse would be deferred until the surviving spouse dies or sells the inherited assets. Assets donated to charity would be exempt.
· Tangible personal property, such as household furniture and personal effects, but excluding collectibles, would be exempt. Earnings on a primary residence of up to $ 250,000 ($ 500,000 for a married couple) would be exempt, as would certain small business stocks.
· Taxes would be deferred for most family-owned and operated businesses until the business is sold or is no longer family-run.
· Taxes on illiquid assets (such as unlisted assets) could be paid over 15 years.
· Separate rules would apply to assets held by trusts and partnerships.
· The tax would generally apply to those who die after December 31, 2021.
Due to these exemptions, no more than 2 or 3 percent of the deceased would pay the tax. Very few people have assets of $ 1 million or more when they die. And remember: Biden would not tax your total assets to the death. I would only tax your unrealized gains.
The escape of the angel of death
Taxing unrealized earnings at death is inexorably linked to Biden’s plan to significantly increase tax rates on realized capital gains for high-income households. If Congress does not tax earnings at the time of death, taxpayers would have a significant incentive to hold onto assets until they die and avoid paying Biden’s highest tax rate.
By doing that, they take advantage of what is called the Angel of Death Lagoon. Not only can the deceased avoid capital gains tax upon death, but current law makes it possible for the tax base of their assets to be “increased” so that any gains accumulated during their lifetime are tax-free forever.
Here’s how it works: Suppose the shares Uncle Jack bought for $ 1 increased in value to $ 10 during his lifetime. Under current law, Jack does not pay taxes on those $ 9 in unrealized earnings during his lifetime or even after his death. His heirs also pay no tax on that $ 9. When they finally sell the asset, they will owe tax only on any increase in the value of the $ 10 it was worth at Jack’s death.
Maintain the wealth tax
Congress could end this practice by moving to Basis of “transfer” for gifts or bequests. In short, Uncle Jack’s heirs would pay taxes based on the difference between the asset’s value when they sold it and Jack’s original $ 1 purchase price. But Jack’s heirs still don’t owe that tax until they dispose of the asset, perhaps not for decades after receiving their inheritance.
This is not what President Biden proposed. Although candidate Biden said he would increase inheritance and gift taxes in addition to taxing unrealized earnings upon death, President Biden has yet to offer such a plan.
However, although Biden would not make direct changes to the wealth tax, His proposed tax upon death would effectively reduce the current estate tax exemption ($ 11.7 million in 2021, with any excess taxed at a maximum rate of 40 percent). The Fiscal Policy Center estimates that fewer than 2,000 properties, accounting for about 0.1 percent of the nation’s 2.9 million deaths, pay current inheritance tax.
While Biden wouldn’t redesign the estate tax, he would fundamentally change the way assets are taxed upon death.