Increases to taxes on capital gains have been proposed with the release last month of President Biden’s Green Book. While we don’t have a crystal ball to see exactly what the future holds, we wanted to give you some insight into what has been proposed.
The way it is now
Under existing law, capital gains held more than a year generally are taxed at 20% and are only taxable upon realization, such as when the asset is sold. Furthermore, if the owner gives an appreciated asset to a donee during the donor’s life, the donor’s basis in that asset carries over to the recipient. The donee does not pay a capital gain at the time of receipt of the gift. The donee only pays any capital gains tax at the time he or she disposes of that asset if that asset has appreciated in value from the donor’s basis to the time of disposal.
If an appreciated asset is held by a decedent at death, the basis of that asset is adjusted (usually “stepped up”) to the fair market value of the asset at the date of the decedent’s death. Consequently, any appreciation that occurs during the decedent’s life is not taxable.
Under Biden’s plan, long-term capital gains for those earning more than $1 million a year would be taxed at ordinary income tax rates, with 37% generally being the highest rate (40.8% including the net investment income tax). This too could increase, based on the president’s tax plan he released in December that would boost the tax rate on income above $400,000 to 39.6% (43.4% with the 3.8% investment income surtax). If the change in capital gains were to be passed by Congress and signed into law by the president, it could be effective retroactively to the date the Biden administration announced the proposal.
Additionally, Biden’s plan proposes treating transfers of appreciated property by gift or at death as “realization events.” This means that the donor would be required to realize the amount of the gain at the time of the transfer, and there would be tax due on the appreciation. This proposal would be effective for transfers after December 31, 2021.
A few exclusions are included in the proposed changes to capital gains taxes.
Transfers to charities: Transfers by a decedent to a U.S. spouse or to charity would carry over the basis of the decedent. The surviving spouse therefore would not realize any capital gain until he or she disposed of the asset or died. Likewise, appreciated property transferred to charity would not generate a taxable capital gain. Special rules also apply for donations to certain trusts.
Tangible property and principal residence: Biden’s proposal would exclude any taxable gain on tangible personal property such as household furnishings and personal effects (excluding collectibles). The $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent’s spouse, making the exclusive effectively $500,000 per couple.
Small business stock: The current exclusion for capital gain on certain small business stock would also apply.
Family-owned and operated businesses: Payment of tax on the appreciation of certain family-owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.
New $1M exclusion: The proposal includes an exclusion of $1 million per-person, which would allow unrealized appreciation on transfers to be reduced by $1 million before the tax applies.
Biden has also proposed changes to gifts and trusts that we will discuss in more detail in a forthcoming article. As you can see, there is much to consider in light of these proposed changes, especially if you are considering retiring or selling your business in the next 10 years. There are a lot of moving parts to these proposals, and we want you to have enough time to make strategic plans for your investments and potential tax implications.
We are wrapping up the 2020 tax filing season and are moving toward tax projections and planning for 2021. We will be in communication with you in the coming weeks and months. Meanwhile, please feel free to reach out to us if you have any questions or would like to schedule a tax planning meeting.
Lindsey M. Pierce, CPA, is a partner with Antares Group, Inc. She can be reached at email@example.com.