President-elect Joe Biden, who is slated to take office in less than two weeks, has plans for individual taxes. The changes could impact the wealthy more than anyone else. Although Biden has somewhat rejected a so-called “wealth tax” supported by Senator Bernie Sanders and Senator Elizabeth Warren, his policy may have a similar impact.
Biden has spoken about taxing unrealized capital gains upon the death of taxpayers earning above $400,000 annually. There's also the possibility of returning to the 2009 estate tax regulations. At the time, the top rate for estate tax was 45 percent and the single taxpayer exemption was $3.5 million, according to TaxFoundation.org.
How estate tax is calculated
An estate tax is a tax on the value of assets held by a person upon their death. The IRS says that this is based on the fair market value of the assets at the time of death and not the price paid for them or the value they held when the person acquired them.
Changes in Biden's estate tax plan
One of Biden’s changes to estate tax plans is to eliminate the basis step-up for inherited assets, according to MarketWatch. The current law states that “federal income tax basis of an inherited capital-gain asset is stepped up fair market value as of the decedent’s date of death.”
Heirs only owe capital gains tax on appreciation after the person’s death, which saves them money. If Congress approves Biden’s plan, that provision might get removed.
Biden also wants to raise the maximum rate on long-term capital gains for individuals with higher income. The rate would increase from 23.8 percent to 39.6 percent. There would be an NIIT rate of 3.8 percent for individuals earning above $1 million. MarketWatch reported that this would mean a maximum effective rate on long-term gains of 43.4 percent.
Who Biden's estate tax plan would impact
The Committee for a Responsible Federal Budget, an independent non-profit organization based in Washington, D.C., has analyzed Biden’s proposed tax plan. MarketWatch noted two major impacts on estate taxes — a higher maximum rate on long-term capital gains and elimination of the basis step-up for inherited assets.
The potential changes in estate tax laws may not just impact high earners. Investopedia noted that the repeal of the step-up in basis rule could eventually “prove very costly over time to heirs of appreciated property at all income levels, not just the wealthiest.”
Biden's estate tax plan might be a double whammy
Some people see Biden’s tax plan as a double whammy, which means that it hits the wealthy from two directions. Economists might point out that estate taxes and capital gains taxes represent a second or third layer of taxes, according to TaxFoundation.org.
The layering is a result of the fact that estate taxes are levied on assets purchased with after-tax income. Capital gains taxes apply to profits that have already been subjected to corporate income tax.
Decreasing the estate tax exemption by a significant percentage, combined with the “step-up in basis” rule’s repeal, could be an expensive one-two punch for those inheriting property and other assets.