Wealthy people can expect a tax rate of up to 61% on inherited wealth under the Biden Plan
According to a recent analysis, wealthy families and tax accountants could face combined tax rates of up to 61% on inherited wealth under President Joe Biden’s tax plan.
As part of his American Families Plan, Biden is proposing to nearly double the top tax rate on capital gains and remove a tax break on valued assets known as a “step-up in base”. The combination of inheritance tax, the new higher capital gain rate and the abolition of the increase in the base could result in effective marginal rates totaling 61%, according to an analysis by the tax foundation.
The tax rate would be the highest tax rate in nearly a century, according to the tax policy research group.
“It’s a big number,” said Brad Sprong, KPMG partner and private company tax officer. “That’s why we urge our customers to be smart and prepare now.”
It is unclear whether Biden’s plan can pass Congress even with changes. Many moderate Democrats are likely to back against his proposal to raise the capital gains rate to 39.6%, as well as the plan to eliminate the topping. In addition, only a small number of the wealthiest taxpayers would ever face a 61% tax rate. Many others would try to avoid this through tax and estate planning.
However, accountants say many wealthy families are beginning to consider the combined effects of several parts of Biden’s plan, which could add up to historically high tax rates.
According to an analysis by the Tax Foundation’s Scott Hodge and Garrett Watson, families who own a company or a large amount of stock and wish to pass the assets on to heirs could see a dramatic change in taxation. For example, imagine an entrepreneur who started a company decades ago that is now worth $ 100 million. Under the current tax system, the company would pass to the family with no capital gains tax. Instead, the value of the business would be “increased” or adjusted to its current value, and the heirs would only pay a capital gain if they later sold at a higher valuation.
Under Biden’s plan, the family would immediately owe withholding tax of $ 42.96 million upon death, which is a capital gains ratio of 39.6% plus net investment income tax of 3.8% minus the $ 1 million tax exemption, according to the Tax foundation.
In addition, if inheritance tax remained unchanged, the family would have to pay inheritance tax of 40% on the remaining $ 57.04 million property value. Including exemptions, the estate tax would be $ 18.13 million.
The combined tax liability for inheritance tax and investment income would be $ 61.10 million, which is a combined effective tax rate of just over 61% on the original $ 100 million asset, according to the Tax Foundation. The rate could be even higher if potential government capital gains and estate taxes are included.
According to tax experts, it is highly unusual, if not unprecedented, to collect both inheritance tax and capital gains tax on death. If the top-up is removed, Congress would likely remove or revise the estate tax.
“Congress has understood in the past that it was bad policy to impose a capital gains tax and an estate tax on the same property,” said the tax foundation.
Sprong recommended clients start by modeling their payments and assets in an attempt to minimize tax. He and others also recommend giving family members maximum gifts sooner in case prices get higher.
“We help clients do a lot of modeling and find the best time to see profits,” said Sprong.