PResidents If Biden succeeds in realizing the core content of his tax plan, it will be impossible to fulfill Biden’s promise to increase taxes only for the wealthiest Americans. Of course, that was to repeal the Tax Cuts and Jobs Act (TCJA) passed during the Trump administration. The main function of the TCJA is to reduce the taxation of the bottom 80% of Americans in the income distribution. In other words, the top 20% earners are the only ones who have not reduced taxes under the TCJA. Americans with annual incomes between US$40,000 and US$80,000 benefit the most from the TCJA, while the millions of other lowest-income groups are completely tax-free.
President Biden and Democrats in the House and Senate have pledged to reverse everything.
For example, the president has vowed to eliminate the so-called “aggravated basis”
This is how it works.
Suppose your parents own a house worth $200,000. Decades ago, they bought this house for $50,000. If they gave you a house before they died, your foundation in the house is the same as them: $50,000. This means that if you sell a house at a current value of $200,000, you must pay capital gains tax on a profit of $150,000 (the difference between the base price and the selling price).
Conversely, if you inherit the house after it dies, your basis is equal to the fair market value of the house on the date of death-in this example, $200,000. See: Code §1014(a)(1). Now, if you sell the property for $200,000, there is no capital gains tax because there is no income (the selling price minus the benchmark equals the income).
This is what we call “gradually improve the foundation.” And the rule is definitely not only applicable to “rich people.” The implementation of Regulation § 1014 is not controlled by an individual’s annual income, the value of inherited assets or the total value of the estate. It applies to the entire field. Every U.S. taxpayer can increase the tax rate on the basis of inheriting property.
If Article 1014 is completely repealed, all inherited property will be sold under capital gains tax. Generally speaking, the benefit will be calculated based on the difference between the selling price and the price paid by the deceased (plus any capital improvements that increase the cost basis). Going back to your parents’ residence, if they paid $50,000 and you sold it for $200,000 after their death, then the $150,000 will be taxed. This example may not be as extreme as it seems. It is unlikely that your parents will stick to their last residence for many years.
However, it is gratifying that the White House seems to be considering exempting the first $1 million of unrealized gains brought about by these new rules. If this ceiling remains unchanged, then inflation over the years may be eroded, if not completely reduced. Or lower it. Be eliminated. In addition, you can expect that the calculation rate of the tax bill will be much higher than the tax rate currently in effect.
According to Gallup data, as of 2017, 82% of Americans over the age of 65 own their own homes. This is the highest homeownership rate of all ages. When these people die, their property is handed over to their heirs. If President Biden and the Democrats succeed, then the next few years will see an increase in wealth transfer-not from parents to children (as it should be), but from parents to the federal government.
Currently, people affected by these proposed changes may have a way to reduce the impact of the law by selling (over-simplified) their primary residence that is eligible for capital gains tax relief and then reducing the number of senior citizens. Want to get rid of the hassle of selling a house in the later stages of life?
Of course, while the impact of tightening rules can be reduced to a certain extent, considering the federal government’s desperation for money based on trillions of dollars, we cannot guarantee that they will continue to spend the past year in a frenzy.
At the same time, pay attention to inheritance tax. In 2021, estates worth less than US$11.7 million will not be subject to estate tax. However, if President Biden does this, the threshold will be cut to 3.5 million U.S. dollars, and the tax rate will increase from 40% to 45%. Considering that the threshold was only $675,000 in 2001, it is not difficult to foresee that this tax will impact middle-income Americans. That’s all for the tax increase for “only the rich”.
Author’s note: Any tax strategy depends on your own situation. Before adopting any taxation strategy, you should first consult the supervisor’s consultant, and you should fully disclose all relevant facts and circumstances of the case to them.
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