Are higher taxes coming to go along with inflation? It sure looks that way. And while some of the spin is being directed at the Billionaire’s tax—that actually kicks in at a tenth of a billion dollars—there are plenty of other tax hikes proposed for more modest earners too. Here’s what is in store for you if the Biden administration’s raft of ambitious tax hikes becomes law the way the Biden administration hopes they will.
1. Increasing 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% starting in 2018. But President Biden wants it back up, from 37% to 39.6%. The 2.6% rate hike would kick in at $450k for joint filers and $400k for single taxpayers.
2. Capital gains taxed as ordinary income over $1M. How about long term capital gains? Currently, the highest capital gain rate is 20%, but you must add the 3.8% Obamacare tax. So that makes the total 23.8%, which is still vastly 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 $1m. Say you make a big gain, having a rate jump 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, such as California’s 13.3%.
3. Repeal of step-up in basis. One of the biggest changes the President hopes to make would be tax on death. Under present law, inherited property receives a full fair market value tax basis on death. The step-up in basis provides tax benefits for everyone passing down appreciated assets, including real estate, stock, family companies and more. For generations, assets held at death have received a stepped-up basis—to market value—when you die. Small businesses count on this. The proposal is to repeal step up in basis. For generations, everyone gets a step up in basis for income tax purposes when they die. That way your heirs can sell property they inherit and not have to pay income tax on the increase in value during the decedent’s life. But that long coveted step up in basis would go away under the Biden administration’s plan. There would be a $5m exclusion from gain on property transferred by gift, and this would be cumulative. But once you use that up, the days of step in basis would be gone, if the provision passes.
4. 20% minimum tax if you have $100M. Next is the Billionaire’s tax, which arguably was misnamed. It would slap a minimum 20% tax on all income, including unrealized gains, for taxpayers with net worth greater than $100M. This includes a requirement to report all assets and your basis to IRS annually. The provision is complex, and these few lines only scratch the surface. The sea change, though, would be to subject to tax just a rise in value, with no triggering event, no sale, no nothing. Talk about radical. It sounds a little like property tax, where the value of your property is assessed. But however you look at it, this one is scary, even if most of us are never going to get close to $100M.
5. Repeal carried interest perk. The President wants to tax carried interests (in partnerships and LLCs) as ordinary income. The carried interest tax treatment—currently taxed as capital gain—has been on the chopping block a few times over the decades. And the enormous tax perk has been stridently defended by hedge funds, private equity funds, and others. There is a lot of money behind that capital gain tax preference that on technical grounds is a little hard to justify. So far, every time Congress has gone after it they have been stopped in their tracks, so perhaps that will happen again here.
6. Repeal 1031. And then there is like-kind exchanges under section 1031 of the tax code. Tax free swap of real estate are kind of everyman’s tax planning, and you can keep on swapping for decades without cashing out. And now the President wants to repeal it. The proposal would only leave in place a limited 1031 deferral provision that would allow deferral of gain from like-kind exchanges up to $500k single/$1m joint filers each year. Beyond those figures, though, 1031 would be dead. If lobbyists are working hard to keep carried interest tax perk, that’s certainly true with 1031 too. The real estate industry at large and the 1031 industry have a lot of power to wield.
There are actually many more tax hikes in the President’s 2023 budget, but these six are big ones. Stay tuned.