6 tax hikes proposed by Biden
Will the tax hike keep pace with inflation? It sure looks like that. And while some of the spin is directed towards the Billionaire Tax, it actually triggers at a tenth of a billion dollars – there are many other tax hikes proposed for lower incomes as well. Here’s what to expect if the Biden administration’s string of ambitious tax hikes become law as the Biden administration hopes.
1. Raise top tax rates for individuals. The top bracket for individuals was 39.6% for many years, until Trump and a cooperative Congress lowered it to 37% from 2018. But President Biden wants it back up, from 37 % to 39.6%. The 2.6% rate hike would be $450,000 for joint filers and $400,000 for single filers.
2. Capital gains taxed as ordinary income over $1 million. What about long-term capital gains? Currently, the highest capital gains rate is 20%, but you have to add the 3.8% Obamacare tax. So that makes a total of 23.8%, which is still much better than 37% or 39.6%. However, one of the president’s proposals is to tax long-term capital gains and qualified dividends as ordinary income if your taxable income exceeds $1 million. Suppose you make a big gain, taking a rate from 23.8% to 39.6% is going to hurt. Of course, most people have to add their state income tax on top of that, like California’s 13.3%.
3. Repeal of the basic increase. One of the biggest changes the president hopes to make would be the death tax. Under current law, inherited assets receive a full fair market value tax base at death. Raising the base provides tax benefits to anyone passing on valued assets, including real estate, stocks, family businesses and more. For generations, assets held at death were given an increased basis – at market value – when you died. Small businesses rely on it. The proposal is to repeal the base step. For generations, everyone has had an increase in the base for income tax purposes when they die. This way, your heirs can sell the property they inherited and not have to pay tax on the increase in value during the deceased’s lifetime. But that long-coveted base raise would disappear under the Biden administration’s plan. There would be a $5 million exclusion from the gain on property transferred by gift, and that would be cumulative. But once you use it, the days of progressive base would be over, if the layout is adopted.
4. Minimum tax of 20% if you have $100 million. Next is the billionaire tax, which was probably misnamed. It would impose a minimum tax of 20% on all income, including unrealized earnings, for taxpayers with net worth over $100 million. This includes the requirement to report all assets and your base to the IRS each year. The layout is complex, and these few lines only scratch the surface. The radical change, however, would be to tax only an increase in value, without a triggering event, without a sale, without anything. Talk about radical. It’s a bit like property tax, where the value of your property is assessed. But no matter how you look at it, this one is scary, even though most of us will never hit $100 million.
5. Repeal the deferred interest benefit. The President wants to tax interest earned (in partnerships and LLCs) as ordinary income. The tax treatment of deferred interest – currently taxed as a capital gain – has been on the chopping block a few times over the decades. And the huge tax advantage has been vehemently defended by hedge funds, private equity funds and others. There’s a lot of money behind this capital gains tax preference which, for technical reasons, is a bit difficult to justify. So far, every time Congress has sued him, they’ve been stopped in their tracks, so maybe it’ll happen again here.
6. Repeal 1031. And then there are like-kind exchanges under Section 1031 of the IRS. Tax-free real estate trading is kind of everyone’s tax planning, and you can keep trading for decades without cashing out. And now the president wants to repeal it. The proposal would leave in place only a limited 1031 deferral provision that would defer gains from similar exchanges up to $500,000 for single filers/$1 million each year. Beyond those numbers, however, 1,031 would be dead. If lobbyists are working hard to retain the tax advantage of carried interest, that’s certainly true with 1031 as well. The real estate industry as a whole and the 1031 industry have a lot of power to wield.
There are actually a lot more tax hikes in the president’s 2023 budget, but these six are important. Stay tuned.