What You Need to Know
- The effective date of the capital gains rate increase would be retroactive.
- Biden's proposal to eliminate the step-up in basis at death went further than expected.
- Congress might substitute stepped-up basis provision with a reduction in the estate tax exemption, said Andy Friedman.
A more detailed look at President Joe Biden’s tax plans, laid out in the Treasury Department’s Greenbook that was released Friday with Biden’s FY 2022 budget, revealed two surprises, according to tax expert Andy Friedman, founder and principal of The Washington Update.
First, the effective date of the capital gains rate increase would be retroactive to April 28, Friedman explained. However, Friedman said that he doesn’t see a final budget resolution retaining the April 28 effective date. “I do expect Congress to adopt an early (pre-2022) effective date — likely without advance notice — perhaps either when the bill is introduced or signed into law,” he said.
The second surprise: “The repeal of stepped-up basis requires gain to be recognized at the time of gift or of death, rather than when the recipient later sells the asset,” Friedman said.
“This rule would require a recipient to incur tax before receiving sales proceeds from which to pay the tax due,” Friedman said. Congress, he added, “might retain this provision, or substitute a reduction in the estate tax exemption, perhaps combined with an increase in the estate tax rate.”
Tax and IRA specialist Ed Slott told ThinkAdvisor Tuesday in a separate email that the proposed change in the stepped-up basis “would add a layer of double taxation since these gains will be taxed for both income and estate tax. IRA and other tax-deferred retirement savings are already taxed that way. IRAs and 401(k)s never received step-up in basis. If eliminating the step up really does happen, it would put IRA taxation on a par with non-IRA investments.”
Slott explained that “even with the proposed $1 million exemption, this tax would still fall heavily on all the wrong targets — like homeowners and small business owners.”