Tax Increases Coming Soon!
By Todd Sehhat, Esq.
President Biden’s American Families Plan announced on April 28, 2021, is the third leg in the POTUS’ Build Back Better initiative designed to rescue, recover, and rebuild the country. This $1.9 trillion package, comprised of $1 trillion in spending and $900 million in tax cuts, will be partially offset by income tax increases for wealthy Americans.
What are some of these proposed tax increases? Well for starters, the income tax rate will be increased to 39.6% from 37% for taxpayers in the top 1% of the federal income tax bracket. Long-term capital gains* and qualified dividends** will be subject to ordinary income tax rates (39.6%) for households earning more than $1 million, up from 20%. The step-up in basis on gains of $1 million or more will be eliminated*** and 1031 exchanges for gains in excess of $500K will also be eliminated.
Income Tax Rate Increase
In accordance with campaign promises and quite frankly, expected by all, President Biden proposes to increase ordinary income tax from 37% to 39.6% for the top 1% of American earners. This change brings the rate back to pre- Tax Cuts and Jobs Act of 2017 (TCJA).
Long-term Capital Gains Increase
The proposed change of the federal tax rate on long-term capital gains for households earning more than $1 million is raising lots of eyebrows. This increase of nearly 100% or close to double the current rate of 20% has more wealthy taxpayers on edge, especially baby boomers who may be ready (post pandemic) to sell their closely-held businesses and retire on after-tax proceeds.
Elimination of Step-up in Basis
The proposed elimination of the step-up in basis rule is also making many Americans uneasy. Currently, the economic gain of property that appreciated prior to death is not subject to federal income tax upon disposition by an heir. However, under the new proposal, stepped-up basis for gains would be eliminated for gains that exceed a $1 million threshold. Fortunately, Biden’s legislation is expected to exclude family-owned businesses and farms if the decedent’s family continues to run the business.
Elimination of 1031 Exchanges
Finally, President Biden’s new economic plan proposes the elimination of a tax break that many real-estate owners have enjoyed since 1921. For decades, 1031 exchanges have allowed investors to defer paying taxes on real-estate gains if they reinvest the proceeds in other properties within six months of the sale. However, President Biden’s proposal would eliminate that deferral for gains in excess of $500,000.
The good news in all of this is that the current administration did not include any of the estate and gift tax changes that were proposed during the 2020 presidential campaign. That being said, the proposed changes, especially the elimination of the step-up in basis, is set to greatly impact estate and tax planning for wealthy families. So, with all of these changes on the horizon and so much uncertainty in the future, Hoffman & Associates recommends that clients review their estate plans as soon as possible with one of our knowledgeable attorneys.
For more information regarding this or any other tax matter and to schedule your appointment, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.
*Long-term capital gains come from assets that are held longer than 1 year
**Qualified dividends are ordinary dividends meeting specific criteria that are currently taxed at a lower capital gains rate rather than the higher individual ordinary income tax rate.
***Step-up in basis refers to the income tax basis of property acquired from, or passing from, a decedent which is currently set to the fair market value of the property at the decedent’s death rather than when it was originally purchased.
****Carried interest is a contractual right that entitles a fund manager to a share of a partnership’s profits and taxable at a lower preferential rate provided certain conditions are met.
- JDSupra, Biden’s Proposed Income Tax Increases And The Sale Of The Baby Boomer Business, Rivkin Radler, LLP, April 26, 2021
- JDSupra, Biden’s American Families Plan Proposes Income Tax Hikes, Holland & Knight LLP, April 30, 2021
- The Wall Street Journal, Biden Proposal Would Close Longtime Real-Estate Tax Loophole, Will Parker, April 28, 2021
