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2 Tax Surprises Revealed in Biden's Budget

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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.”

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Step-up in basis turns 100 years old this year, Slott said. “Hopefully, it will continue. If not, a fortune in unexpected taxation will occur at death, and not only to the billionaires. They will surely find ways around this, leaving homeowners and small business owners to pay the bill. Not fair.”

The stepped-up basis, Slott added, is “not only eliminated (other than for the $1 million and some other exemptions) but there is a recognized gain at death or transfer as if the property or stock were actually sold, when it wasn’t. If that is so, then that means a tax would have to be paid on property that was not yet sold. Money would be needed from other sources. This is an awful plan.”

Friedman noted some of the more “far-reaching” tax proposals in Biden’s plan include an increase in the top individual tax rate from 37% to 39.6%. “I believe that any final legislation will include this change,” he said.

However, Biden’s plan to increase the capital gains and dividend tax rate from 20% to 39.6% will likely result in passage of “a lesser increase in the capital gains and dividend rate, perhaps in the 25%-28% range.”

As to an increase in the corporate tax rate from 21% to 28%, “I believe any final legislation will include a lesser increase in the corporate rate, perhaps in the 25%-26% range,” Friedman said.