Wealthy may face up to 61% tax rate on inherited wealth under Biden plan

Wealth


Wealthy families could face combined tax rates of as much as 61% on inherited wealth under President Joe Biden’s tax plan, according to a recent analysis and tax accountants.

As part of his American Families Plan, Biden is proposing to nearly double the top tax rate on capital gains and eliminate a tax benefit on appreciated assets known as the “step-up in basis.” Combining the estate tax, the new higher capital gains rate and the repeal of step-up in basis could bring total effective marginal rates as high as 61%, according to an analysis from the Tax Foundation.

The rate would be the highest such rate in nearly a century, according to the tax policy research group.

“It’s a big number,” said Brad Sprong, KPMG partner and private enterprise tax leader. “That’s why we’re telling our clients to be smart and start preparing now.”

It’s unclear whether Biden’s plan can pass Congress, even with changes. Many moderate Democrats are likely to push back against his proposal to raise the capital gains rate to 39.6% as well as the plan to eliminate the step-up. What’s more, only a small number of the wealthiest taxpayers would ever face a rate of 61%. Many others would look to avoid it through tax and estate planning.

Yet accountants say many wealthy families are starting to consider the combined impacts of several parts of Biden’s plan, which could add up to historically large tax rates.

According to an analysis by Scott Hodge and Garrett Watson at the Tax Foundation, families who own a business or large amount of stock and want to pass the assets to heirs could see a dramatic tax change. Consider, for example, an entrepreneur who started a business decades ago that’s now worth $100 million. Under the current tax regime, the business would pass to the family without a capital gains tax. Instead, the value of the business would be “stepped-up,” 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 a capital gains tax of $42.96 million upon death, reflecting the capital gains rate of 39.6%, plus the net investment income tax of 3.8%, minus the $1 million exemption, according to the Tax Foundation.

In addition, if the estate tax remains unchanged, the family would also face an estate tax of 40% on the $57.04 million of remaining value of the assets. Including exemptions, the estate tax would amount to $18.13 million.

The combined estate tax and capital gains tax liability would total $61.10 million, reflecting a combined effective tax rate of just over 61% on the original $100 million asset, according to the Tax Foundation. The rate could go even higher when including potential state capital gains and estate taxes.

Imposing both the estate tax and capital gains tax at death is highly unusual, if not unprecedented, tax experts said. If the step-up is eliminated, they said, Congress would likely eliminate or overhaul the estate tax.

“Congress has historically understood that it was bad policy to levy a capital gains tax and estate tax on the same assets,” according to the Tax Foundation.

Sprong recommended clients start modeling out their payments and assets to try to minimize the tax. He and others also recommend making maximum gifts to family members sooner, in case rates go higher.

“We’re helping clients to do a lot of modeling and to figure out the best timing for recognizing gains,” Sprong said.



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