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Financial Planning > Tax Planning > Tax Reform

Capital Gains, Income or Estate Tax Changes: Which Would Have Biggest Impact?

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What You Need to Know

  • The proposed capital gains tax hike came out the winner in a Twitter poll.
  • Elimination of the stepped-up basis on assets at death would have the biggest effect, some commenters argued.

A day before President Joe Biden’s scheduled first address to a joint session of Congress Wednesday evening, Jeffrey Levine, chief planning officer at Buckingham Wealth Partners, sparked a debate on Twitter, asking his followers to vote on whether Biden’s ordinary income tax, capital gains tax or estate/gift tax proposal would have the biggest impact.

Biden’s proposed capital gains tax hike came out on top, at 39%, ahead of the ordinary income tax’s 32.6% and the estate/gift tax’s 28.4%.

The Biden plan, unveiled Wednesday morning, laid out $1.8 trillion in spending over 10 years to support American families, with a major expansion in spending on child care, paid leave and education. The American Families Plan, which Biden will tout in the joint address to Congress Wednesday night, is funded in part by $1.5 trillion of tax hikes on the wealthiest Americans.

The potential capital gains tax increase stands to affect “a lot more people than people realize,” Levine told ThinkAdvisor in a phone interview on Friday. “It’s not the clients that make a million dollars or more every year that you need to be worried about.”

A proposed elimination of the step-up in basis on assets at death, along with making death a “realization” of gains, meanwhile, will essentially mean that all assets will be treated as if they have been sold on the day that somebody dies, Levine also said on Friday.

(While the Biden plan includes an elimination of the step-up in basis, it does not change the estate tax rate or exemptions, which surprised some observers.)

To a Twitter follower who tweeted that a capital gains tax hike would dissuade middle-income taxpayers from starting (and later selling) small businesses, Levine tweeted in response: “It’s a fair point, though I think you’d see a dramatic increase in the use of installment sales to spread the gain over many years. Example: Sell your biz for $5MM and take a 7-year installment note and you’re going to be able to stay below the $1MM mark (barring other income).”

Responding to a follower who asked Levine which of the three potential changes would have the least negative impact (or most positive impact) on the economy and also be the fairest, Levine tweeted: “In a vacuum, estate/gift tax changes would have the biggest positive impact for the economy. It’s the only change that directly encourages more economic activity.”

Making a case for the estate tax having the biggest impact, Aaron Brickley, a certified financial planner and financial advisor at family RIA firm Brickley Wealth Management in San Mateo, California, tweeted: “Estate tax has the potential to impact more people, depends on whether step-up goes away and how drastic the exemption reduction is. I’m not sure how it doesn’t lead to people selling assets ahead of death to reduce [their] taxation and reduce taxable estate by way of tax payments.”

The “big winner” of all three potential tax changes is “complexity and those who benefit from it,” according to Tariq Dennison, wealth manager at GFM Asset Management. ”The big losers are simplicity and unity, two ideas American voters seem to have given up on long ago,” he tweeted.

Breaking away from the pack, however, Brandon Unger, business development and marketing manager at insurance firm Algren Associates in New York, tweeted his prediction: “I don’t think any of the proposed changes are that significant. What eventually gets signed will be even less so.”


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