President Biden’s proposed budgetary plan may make it difficult to meet his campaign promise never to raise taxes on those making $400,000 a year or less. According to some experts from the Tax Policy Center, Biden’s proposal to increase the capital gains tax may mean that about 2 percent of those who made $400,000 or less will face a tax increase at death.
Current law allows taxpayers to avoid paying capital gains taxes if they hold on to their assets until death. A capital gain is the profit you receive when you sell an asset of any kind. When this sale occurs, the gain is considered taxable income. However, if you inherit property, current law only taxes the increase in that property’s value from the time you inherit it (instead of the value when it was originally purchased) to the time you sell it, which often dramatically reduces the amount of tax paid.
However, Biden’s proposal includes a new tax on any capital gains over $1 million after death. If this plan moves forward, inherited assets would be treated as if they’ve been sold and any increase in value above the $1 million threshold would be taxed. The President’s proposal would also tax long-term capital gains at the same rate as income for those with an annual income of $1 million or more. For this income bracket, individual income would be taxed at 39.6 percent under Biden’s American Families Plan.
Recent estimates show that 83 percent of Americans over age 70 live in a household with a total net worth of less than $1 million. The Tax Policy Center projects that less than 3 percent of these households would be taxed on unrealized capital gains if Biden’s plan moves forward. Even if Biden were to raise the threshold for the capital gains tax, some with less than $400,000 of income would still be impacted, particularly since retirees tend to have lower current income but may have years of unrealized gains on their assets.
Among the many changes to capital gains taxes, the qualified small business stock (QSBS) exclusion has so far remained untouched. Current tax law allows inherited QSBS to benefit from the capital gains tax exemption that allows 100% of capital gains to be excluded if the stock meets IRS requirements. QSBS can be gifted during the original owner’s lifetime or at death and still be considered QSBS. The beneficiary essentially inherits not only the stock itself but also the stock’s holding period and means of acquisition.
QSBS Expert can guide you in identifying stock opportunities and taking advantage of the financial benefits of QSBS.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.