The Biden administration’s plan to hike the inheritance tax bill for wealthy Americans will snare the middle class, farmers and family businesses in a double taxation dragnet to finance its massive spending plans, according to tax experts.
President Joe Biden’s vast expansion of social spending programs will be funded in part by ending ‘step-up in basis,’ a provision which protects estates from capital gains tax at death.
Biden says the aim is to close a loophole that allows rich families to pass wealth from generation to generation.
But congressional Republicans warn it could have a devastating impact on family businesses, particularly farms, and Democrats have begun considering ways to limit the damage.
Chad Silver, attorney, said the rich would find new loopholes while the middle classes would get hit with bills on ‘unrealized gains’ – property and other assets that have risen in value.
President Biden’s plans mean some families may face paying capital gains tax on estates to fund his massive spending proposals. At present, all but a few thousand are exempt
Couple’s will have a $2.5 million exemption, which means most families will escape the new charges, including the Bidens who are unlikely to face capital gains on assets largely made up of their two Delaware homes
The Bidens bought their home in Rehoboth Beach, Delaware, in 2017 for $2.7 million
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The harsh new tax is being dubbed Biden’s ‘death tax’ and it’s receiving ferocious backlash across the aisle.
It proposes that when someone dies, any asset they leave behind to their kids that has appreciated in value to more than $1million should be taxed.
The tax would apply to the amount the asset’s value has increased by, so if a woman bought a home in New York in the 1970s for $200,000 and by the time she sells it, it has increased in value to $2million, the $1.8million increase is what is taxed when her children receive it.
The first $1million is exempt, so the 40.8% Biden death tax would be imposed on the remaining $800,000, producing an immediate tax bill upon the woman’s death for her kids of $326,400. Right now, they wouldn’t pay anything. Experts say that change will force some to sell the asset they’ve inherited just to be able to pay the tax on it.
Estates that are worth more than $11million would be taxed twice – once under Biden’s 40.8% for everything over $1million, and again at 40% for everything over the current exemption of $11.7million.
It means if someone inherits an estate of $100million, they’d immediately pay $42million under Biden’s proposed tax, plus a further $18million under the current rules for what’s taxed over $11.7million.
Their total tax bill, in that case, would be $61million – 61 percent of what they inherited.
‘Taxpayers have already paid taxes on the money to acquire real property such as homes. It seems patently unfair to tax them twice on unrealized gains – once after they have earned the money and again after they have died,’ he said.
‘Wealthy people will figure out an end run around these proposals via trusts or other asset transfer vehicles.
‘Middle class will get caught in the unrealized gain tax drag net because they do not have access to tax attorneys or CPAs who can help them plan around these taxes.’
To offset his spending plans, Biden wants to change the rules on how capital gains tax is imposed on estates.
At present, the stepped up basis 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.
So a mother can pass on her house to her children without them having to pay tax on its capital growth. They would only pay capital gains on its growth in value after they take ownership.
That would change with proposals outlined in the Treasury’s green book last month, which sets out the administration’s tax plans.
‘Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer,’ it said.
That means assets would now be taxed at Biden’s proposed new higher effective capital gains tax rate of 40.8% at death.
So heirs would inherit an estate reduced by taxes.
The plan outlines allowance of $1.25 million for individuals and $2.5 million for couples.
That protects many estates – including that of the Bidens, whose main taxable assets are two houses, which are not believed to have appreciated by 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 making American pay tax for ‘on paper’ gains was fraught with administrative problems.
It also would fail to take account of inflation.
‘It is clear that the Biden Administration is looking for huge amounts of new revenue, and as a result they’re employing nearly every tax hike tactic in the book short of a new levy like a national VAT,’ he said.
‘Eliminating step-up-in-basis is just one component of that, but an important one.
‘It does, in effect, re-establish the death tax in a pretty significant way for taxpayers that are not necessarily uber-rich.’
Analysts believe the proposals may amount to a moonshot wish list that can be negotiated down.
The issue has hit resistance among Democrats on Capitol Hill.
Staff for House Ways and Means Chair Richard Neal recently floated the idea of allowing beneficiaries to postpone paying the bill as long as they hang on to the asset, according to Bloomberg News.
Republicans are warning that family businesses and farms could be very badly affected.
Minority Senate Leader Mitch McConnell flagged the issue in April, when he said: ‘The exemption would be lowered to a million dollars, which may sound like a lot of money to some people, but not if you’ve got a small business or a family farm.’
Officials say they will ensure that protections are in place.
‘This reform will be designed with explicit protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run those businesses,” a senior official told reporters in an April briefing.
The Treasury’s green book, setting out tax changes, offers further guidance suggesting tax on businesses would not have to be paid until it had been sold.
‘Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated,’ it said.
Republican senators from farming states have written to the Department of Agriculture seeking an explanation.
‘As part of your explanation, please be sure to specify what special rules or exceptions you are assuming would exist for farm estates,’ ask the senators, including John Boozman, ranking member of the committee on Agriculture, Chuck Grassley of Iowa, Tommy Tuberville of Alabama, and Joni Ernst of Iowa.
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The Bidens bought their Rehoboth Beach home for $2.7 million in 2017
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 homes, annuities and life insurance policies.
They built their Wilmington, Delaware, home on land bought for $350,000 in 1996. It is now estimated to be worth $2 million.
Their Rehoboth Beach house, also in Delaware, cost $2.7 million in 2017.
That means the total appreciation is likely to be less than the $2.5 million couple’s exemption.
And their estate would pay nothing.
How a widow in New York would leave descendants with huge tax bill for house she bought decades ago, under Biden’s plan
Families who made money from New York homes could face hefty tax bill
Suppose a widow buys a house in New York for $250,000 in the 1970s.
She never remarries and by the time of her death her only asset is the home.
She leaves her house, now worth $2.5 million, to her children.
Under current law, the estate faces no capital gains tax.
Her children inherit the house at a value of $2.5 million and would only pay capital gains on its sale.
Under Biden’s proposals, the estate would be subject to capital gains tax.
Its increase is $2.25 million, less a $1.25 million exemption, leaving a taxable amount of $1 million.
At 40.8% that would bring a $408,000 tax bill.