As discussed in our January 12, 2021 article, “The Biden Tax Plan – Highlights,” President Joe Biden’s campaign platform included proposed tax changes which would negatively impact high net worth taxpayers. Now that some time has passed since the election and Washington insiders have had time to take the temperature of the current legislature, we may have a better idea of what is actually likely to pass. In addition, President Biden outlined his American Families Plan (AFP) to Congress on April 28th and some of the proposals were modified. Additionally late Tuesday night July 13th Democrats announced a $3.5 trillion spending proposal with a broad outline for policy spending initiatives but no specifics on the tax ramifications. Whether the forthcoming budget resolution can clear both chambers with the current proposals intact and with the full party support necessary to circumvent a GOP filibuster remains to be seen. We will keep you informed of any significant updates. In the meantime, below are highlights and the most likely outcome based on numerous expert opinions we have reviewed.
Change in Top Income Tax Bracket
The Biden Plan: Increase the top tax bracket for taxpayers earning more than $400k back to the 39.6% rate in effect before the Tax Cuts and Jobs Act (TCJA) reduced the bracket to 37% in 2018. The AFP modified the top bracket to around $452k for individuals and $509k for married couples.
Washington Insider Consensus Opinion: YES. This will pass.
Change in Tax Rate on Long Term Capital Gains
The Biden Plan: Eliminate the tax preference on long term capital gains and tax as ordinary income to the extent the taxpayer’s income exceeds $1 million.
Washington Insider Consensus Opinion: YES/NO. The rate will likely increase but not to more than 28% which is the revenue maximizing rate. If the capital gains tax is increased more, sales activity like IPOs/mergers start to fall off and net tax revenues ultimately decline. This is what happened in 1968 when capital gains rates went from 20% to 40%. Jimmy Carter later reduced capital gains rates from 40% to 28% in 1978 and the rate hasn’t been above 30% since.
Will the Effective Date for the Changes to Taxation of Capital Gains be Retroactive?
Biden Tax Plan: The AFP set the effective date to April 28, 2021.
Washington Insider Consensus Opinion: NO. It is rare for a change of this magnitude to apply retroactively. While it is possible the effective date could be the date of the first committee action in the fall, January 1, 2022 is more likely.
Elimination of Capital Gains Step Up at Death
Biden Tax Plan: Eliminate the step up in tax basis to fair market value at the death of the grantor. Instead of essentially wiping out the built-in gains, unrealized appreciation above $1million ($2million for joint filers, plus the current primary residence exclusion of $250k single/$500k joint) would be taxable at the decedent’s death.
Washington Insider Consensus Opinion: NO. The proposed rules are far too complicated for members of Congress and as drafted every family farm would be hit. Outside of 2010 when the estate tax was repealed for one year, the step up was eliminated only once in 1976. It proved so unworkable (largely because of the inability to locate records of tax basis) that it was repealed in 1979. Interestingly, at that time only four US Senators voted against repeal and one was President Biden.
Reduction in Lifetime Estate & Gift Tax Exemption
Biden Tax Plan: The original proposal to reduce the lifetime exemption from $11.7 million per person currently to the 2009 amount of $3.5 million was dropped in President Biden’s AFP. Note however that under the TCJA, the exemption amount will automatically sunset back to the pre-TCJA level of $5 million per person in 2025 unless further legislative action is taken.
Washington Insider Consensus Opinion: N/A. This proposal has been dropped by the Biden Administration.
Increase in Top Estate & Gift Tax Rate
Biden Tax Plan: The original proposal to increase the maximum estate and gift tax rate for individuals from 40% to the 45% rate in effect in 2009 was not included in the AFP.
Washington Insider Consensus Opinion: Maybe. While the increase was not included in the AFP, it may be taken up again during reconciliation.
What about the SALT Itemized Deduction Limitation?
Under the TCJA, deductions for state and local taxes (“the SALT deduction”) are capped at $10,000 (for both single taxpayers and married couples filing a joint return). The $10,000 cap includes both state and local income taxes, as well as property taxes. Taxpayers living in areas of the country with high SALT taxes such as California and New York, were disproportionately impacted. While the Biden tax plan does not address the SALT deduction limitation it is likely the limitation will be repealed, since the most impacted areas of the country are largely Democratic party-controlled. Note that under the TCJA, the limitation will already automatically expire in 2025 unless further legislative action is taken.
Washington Insider Consensus Opinion: YES. Likely to pass some type of relief – if not full repeal then increase of the cap to $25,000. Representative Pelosi and Senator Schumer are from high taxing states of California/NY and a number of moderate Democrats are from wealthy areas. The repeal will help to offset the negative optics of any individual tax increases.
General Disclosures: Please consult your Tax Advisor for a complete discussion of your situation and specific tax consequences. The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer decisions. All expressions are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results. Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited.