The Biden administration’s plan to raise estate taxes for wealthy Americans will, tax experts say, lure the middle class, farmers and family businesses into a double taxation loop to fund their massive spending plans.
The huge expansion of President Joe Biden’s welfare spending programs is being funded in part by the termination of the “step-up-in basis,” a provision that protects estates from capital gains tax on death.
Biden says the goal is to fill a gap that allows wealthy families to pass wealth from generation to generation.
But Republicans in Congress are warning that this could have a devastating impact on family businesses, particularly farms, and Democrats have begun to consider ways to limit the damage.
Lawyer Chad Silver said the wealthy are finding new outlets while the middle class is being hit with bills of “unrealized gains” — homes and other assets that have gone up in value.
President Biden’s plans mean some families may have to pay capital gains taxes on estates to fund his massive spending proposals. All but a few thousand are currently exempt
Couples will have a $2.5 million waiver, meaning most families will avoid the new charges, including the Bidens, who are unlikely to make capital gains on assets consisting largely of their two Delaware homes
The Bidens bought their home in Rehoboth Beach, Delaware for $2.7 million in 2017
How President Biden plans to plunder inheritances to pay for his American Families Plan by lowering the estate tax threshold
Dubbed Biden’s “death tax,” the harsh new tax is drawing backlash from across the aisle.
It proposes that when someone dies, any wealth they leave to their children that has an appreciation of more than $1 million should be taxed.
The tax would be levied on the amount by which the value of the asset has increased. So if a woman bought a $200,000 home in New York in the 1970s and sold it, it would have increased in value to $2 million, an increase of $1.8 million in what she would be taxed on , when their children receive it.
The first million is exempt, so the 40.8 percent Biden death tax would be levied on the remaining $800,000, resulting in the woman’s immediate post-death tax bill for her children of $326,400 would. Right now they wouldn’t pay anything. Experts say the change will force some to sell inherited wealth just to pay taxes on it.
Estates worth more than $11 million would be taxed twice — once below Biden’s 40.8% for anything over $1 million and again at 40% for anything over the current $11.7 million tax exemption.
That means if someone inherits a $100 million estate, they would immediately pay $42 million under Biden’s proposed tax, plus an additional $18 million under current rules for what’s over $11.7 million dollars is taxed.
Their total tax bill would then be $61 million – 61 percent of what they inherited.
“Taxpayers have already paid taxes on the money to acquire properties like houses. It obviously seems unfair to tax them twice on unrealized gains – once after they make the money and again after they die,” he said.
“Wealthy people will figure out how to circumvent these proposals via trusts or other asset transfer vehicles.
“The middle class will be dragged into the unrealized income tax because they don’t have access to tax attorneys or CPAs who can help them plan those taxes.”
To balance his spending plans, Biden wants to change the rules for how capital gains taxes are collected on estates.
Currently, the enhanced base rule protects heirs to estates worth less than $11.7 million.
It allows them to inherit assets without paying capital gains tax on their value – or the unrealized gains.
A mother can thus pass on her house to her children without them having to pay tax on the capital gain. They would only pay capital gains on the appreciation after taking ownership.
That would change with proposals outlined last month in the Treasury Department’s green paper setting out the government’s tax plans.
“Under the proposal, the donor or deceased owner of an estimated asset would realize a capital gain at the time of transfer,” it said.
That means assets would now be taxed at Biden’s proposed new higher effective capital gains tax rate of 40.8% on death.
Heirs would therefore inherit an estate reduced by taxes.
The plan provides an allowance of $1.25 million for individuals and $2.5 million for couples.
That protects many lands — including those of the Bidens, whose top taxable assets are two houses believed to be valued at no more than $2.5 million, according to a recent analysis published by The Wall Street Journal.
Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, said getting Americans to pay taxes on “paper” gains is fraught with administrative problems.
Inflation is also not taken into account.
“It’s clear that the Biden administration is looking for huge amounts of new revenue, and as a result they’re employing almost every tax hike tactic in the book save for a new tax like a national sales tax,” he said.
“Abolishing the step-up-in basis is just one component of this, but an important one.
“It actually reintroduces the death tax in quite significant ways for taxpayers who aren’t necessarily affluent.”
Analysts believe the proposals could result in a moonshot wish list that can be negotiated downwards.
The issue has met with opposition from Democrats on Capitol Hill.
Richard Neal, aide to the House Ways and Means chairman, recently floated the idea of allowing beneficiaries to defer paying the bill as long as they hold on to the asset, according to Bloomberg News.
Republicans warn that family businesses and farms could be hit hard.
Minority Senate leader Mitch McConnell pointed to the problem in April when he said: “The exemption would be reduced to $1 million, which might sound like a lot of money to some people, but not if you run a small business or a… have family farm.’
Officials say they will ensure safeguards are in place.
“This reform will come with explicit safeguards so that family businesses and farms do not have to pay taxes when passed on to heirs who continue to run those businesses,” a senior official told reporters at a briefing in April.
The Treasury Department’s green paper laying out tax changes offers further evidence suggesting that taxes on companies need not be paid until they have been sold.
“Payment of taxes on the capital appreciation of certain family-owned and operated businesses would not be due until interest in the business is sold or the business is no longer family-owned and operated,” it said.
Republican senators from agricultural states have written to the Department of Agriculture asking for an explanation.
“As part of your statement, please be sure to state what special rules or exceptions you think would apply to agricultural properties,” ask the senators, including Senior Committee on Agriculture John Boozman, Chuck Grassley of Iowa and Tommy Tuberville of Alabama, and Joni Ernst from Iowa.
How Joe and Jill Biden would avoid an increased tax bill under changes he proposes to fill the gap
The Bidens bought their Rehoboth Beach home in 2017 for $2.7 million
Joe and Jill Biden have an estimated net worth of $8 million, according to Forbes.
The President’s financial disclosure forms show assets that include two houses, annuities and life insurance policies.
They built their home in Wilmington, Delaware on a lot they bought in 1996 for $350,000. It is now valued at $2 million.
Her home in Rehoboth Beach, also in Delaware, cost $2.7 million in 2017.
That means the total increase in value will likely be less than the couple’s $2.5 million release.
And her estate would pay nothing.
How a widow in New York would leave offspring with a huge tax bill for a home she bought decades ago on Biden’s plan
Families who made money from homes in New York could face a hefty tax bill
Suppose a widow buys a house in New York for $250,000 in the 1970s.
She never remarries and at the time of her death her only assets are the house.
She leaves her home, now worth $2.5 million, to her children.
Under current law, the estate is not subject to capital gains tax.
Her children will inherit the home at a value of $2.5 million and would only pay capital gains on sale.
Under Biden’s proposals, the estate would be subject to capital gains tax.
His increase is $2.25 million less a $1.25 million tax exemption, leaving a taxable amount of $1 million.
At 40.8%, that would yield a $408,000 tax bill.