The rich may face a tax rate of up to 61% on inherited wealth under the Biden plan

The rich may face a tax rate of up to 61% on inherited wealth under the Biden plan


Wealthy families could face combined tax rates of up to 61% on inherited wealth President Joe Biden’s tax plan, according to a recent analysis and tax accountants.

As part of its U.S. plan for families, Biden is proposing to nearly double the top capital gains tax rate and eliminate a tax advantage on appreciated assets known as a “step- up in base ”. The combination of the inheritance tax, the new higher rate of capital gains and the repeal of the increase in the base could raise the total effective marginal rates up to 61%, according to an analysis of the Tax Foundation. The rate is said to be the highest of its kind in nearly a century, according to the Tax Policy Research Group.

“That’s a lot,” said Brad Sprong, KPMG partner and private business tax manager. “That’s why we’re telling our customers to be smart and start preparing now.”

It’s unclear if Biden’s plan can pass Congress, even with changes. Many moderate Democrats are likely to push back his proposal to raise the capital gains rate to 39.6% as well as the plan to eliminate the step-up. Moreover, only a small number of the wealthiest taxpayers would face a rate of 61%. Many others would seek to avoid it through tax and estate planning.

Still, accountants say many wealthy families are starting to factor in the combined effects of several parts of Biden’s plan, which could translate into historically high tax rates.

According to an analysis by Scott Hodge and Garrett Watson of the Tax Foundation, families who own a business or a large amount of stock and want to pass the assets on to their heirs could see a drastic tax change. Take the example of an entrepreneur who started a business decades ago and is now worth $ 100 million. Under the current tax system, the business would pass to the family without capital gains tax. Instead, the value of the business would be “increased” or adjusted to its present value, and the heirs would only pay a capital gain if they later sold at a higher value.

According to Biden’s plan, the family should immediately have a capital gains tax of $ 42.96 million upon death, reflecting the capital gains rate of 39.6%, plus net income tax. 3.8% investment, less the $ 1 million exemption, according to the Tax Foundation.

In addition, if the estate tax remains unchanged, the family will also face an estate tax of 40% on the $ 57.04 million of residual value of the assets. Including the exemptions, the estate tax would amount to $ 18.13 million.

The combined inheritance tax and capital gains tax would total $ 61.10 million, reflecting a combined effective tax rate of just over 61% on the original assets of $ 100 million , according to the Tax Foundation. The rate could go even higher by including potential state capital gains and inheritance taxes.

Imposing both inheritance tax and capital gains tax on death is very common, if not unprecedented, tax experts have said. If the intensification is eliminated, they said, Congress would likely eliminate or revise the inheritance tax.

“Congress has always understood that it was bad policy to levy capital gains tax and inheritance tax on the same assets,” according to the Tax Foundation.

Sprong recommended that customers start modeling their payments and assets to try and minimize the tax. He and others also recommend giving family members as much as possible earlier, in case the rates go up.

“We help our clients do a lot of modeling and find the best time to recognize the gains,” Sprong said.

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