Wealthy families could face combined tax rates of up to 61% on the hereditary wealth of President Joe Biden’s tax plan, according to a recent analysis by tax accountants.
As part of his plan for American families, Biden is proposing to almost double the highest tax rate on capital gains and eliminate tax breaks on valued assets known as “base increases.” The combination of property tax, the new higher rate of capital gains and the abolition of the base increase could lead to overall effective marginal rates of up to 61
According to the tax policy research group, this rate will be the highest in nearly a century.
“This is a large number,” said Brad Spring, a partner at KPMG and a leader in the taxation of private companies. That’s why we tell our customers to be smart and start preparing now.
It is unclear whether Biden’s plan can pass Congress, even with changes. Many moderate Democrats are likely to back down against his proposal to increase capital gains to 39.6%, as well as a plan to lift the boost. Moreover, only a small number of the richest taxpayers would face a percentage of 61%. Many others would like to avoid it through tax and property planning.
Still, accountants say many wealthy families are beginning to consider the combined effects of several parts of Biden’s plan, which could lead to historically high tax rates.
According to an analysis by Scott Hodge and Gareth Watson of the Tax Foundation, families who own a business or a large number of shares and want to transfer the assets to heirs could see a drastic tax change. Consider, for example, an entrepreneur who started a business decades ago and now costs $ 100 million. Under the current tax regime, the business will move to the family without capital gains tax. Instead, the value of the business would be “increased” or adjusted to its present value, and the heirs would pay capital gains only if they were subsequently sold at a higher valuation.
According to Biden’s plan, the family should immediately owe capital gains tax of $ 42.96 million at death, reflecting a 39.6% capital gains rate, plus a 3.8% net investment income tax, minus the $ 1 million exemption, according to the tax foundation.
In addition, if the property tax remains unchanged, the family will also face a property tax of 40% on $ 57.04 million of the remaining value of the assets. Including exemptions, the inheritance tax will amount to $ 18.13 million.
The combined tax liability on property tax and capital gains tax will amount to $ 61.10 million, reflecting a combined effective tax rate of just over 61% on the original asset of $ 100 million, according to the tax foundation. The rate could become even higher if potential state profits and property taxes are included.
The imposition of both a property tax and a capital gain tax on death is extremely unusual, if not unprecedented, tax experts said. If the improvement is removed, they said Congress is likely to abolish or revise the property tax.
“Congress has historically understood that it is a bad policy to tax capital gains tax and property tax on the same assets,” according to the tax foundation.
Sprong recommends that customers start modeling their payments and assets to try to minimize the tax. He and others also recommend making maximum gifts to family members earlier in case rates go up.
“We help customers do a lot of modeling and find the best time to recognize profits,” said Spring.