During last year’s Presidential campaign, then-candidate Joe Biden ran on a platform of expanded social programs paid for, in part, by proposed tax increases on wealthy Americans. The American Family Plan announced at the end of April would expand paid family leave, increase access to childcare and prekindergarten education, and make community college tuition-free.
Funding for these programs would be met by sweeping reforms to current tax law, including an increase in top capital gains and income tax rates plus adjustments to rules surrounding inherited assets. Given these potential changes on the horizon, how might you and your family be impacted and should you take action today? Let’s first take a look at some of the proposed changes:
Capital Gains Rates
Under current tax rules, the sale of an asset, such as a stock or mutual fund, real estate, and even collectables like coins or jewelry are subject to tax on the gain (less exemptions for certain real estate transactions). Federal long term capital gains rates range from 0% for those in the lowest income tiers to a maximum of 20% plus a 3.8% Medicare surtax for the highest earners. Under the proposed plan, households with incomes greater than $1 million in a given year would pay an increased capital gain rate of 39.6% plus the 3.8% Medicare surtax for a total rate of 43.4%. Taxpayers would also be on the hook for any state or local taxes, depending on the rules of their resident state.
Marginal Income Tax Rates
The Tax Cuts and Jobs Act (TCJA) passed by former President Trump in 2017 reduced the top Federal tax rate for earned income to 37%. President Biden’s plan would restore the top rate to its previous level of 39.6%, in addition to levying payroll taxes on individuals with incomes over $400,000 per year. It would also cap deductions for high income earners, limiting what can be written off on tax returns.
Step-Up in Basis
Individuals who inherit assets currently receive a “step-up” in basis to the fair market value of the asset as of the date of death of the original owner, meaning heirs only pay tax on any appreciation enjoyed between when the assets were inherited and later sold. To discourage people from hanging on to appreciated assets until they die and escaping taxation on the appreciation, President Biden’s proposal would eliminate the step-up in basis and tax inherited assets as if they were sold at the original owner’s death, after applying a $1 million exemption per individual.
What does this mean for you?
Though the vast majority of Americans will not be impacted by these proposed changes, individuals with appreciated investments or real estate may face a much larger tax bill than expected when it comes time to sell or pass down assets. As tempting as it may be to get ahead of potential tax increases in an attempt to “lock in” today’s lower rates, it’s important to remember there are many unknowns that lie ahead as the American Family Plan works its way through Congress.
Instead of making drastic moves today based on what might happen in the future, now is a great time to revisit your plan for appreciated investments, the timing of income, and intentions for passing assets to heirs.
Want to talk more about your specific situation? Reach out to us today.