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A Peek at Two Provisions in Biden's Tax Proposal


I usually don't write a lot about proposed changes to Tax Law, but the budget recently sent to Congress by the Biden Administration has two items that are worth taking a look at.

Increasing the Capital Gains Tax Rate

First, the Biden Administration is proposing increasing the taxes on Long-Term Capital Gains and Dividends to a maximum of 39.6% (current maximum is 20%). Additionally, those subject to the highest rate will also pay an additional Net Investment Income Tax (ObamaCare Surtax) of 3.8% for a total of 43.4%. Add on typical State Income Tax (5.75% in VA) and you end up sending almost 50% (49.15%) of the gains to the Government.

The good news it appears that this won't apply to many taxpayers, as income (not yet defined) must exceed $1M to be subject to this tax rate.

There is a darker side to this tax increase though. It most likely will go into effect immediately when the law is signed or retroactively. The Biden Administration's proposal sets the effective date as 28 Apr 21. If you're expecting an event that could significantly increase your income (selling a rental property) and put you over the income threshold, you might want to consider an installment sale to spread the income over several years. You might want to do this even if you sell the property before the proposal becomes law.

Eliminating Step-up in Basis

Under current tax law, upon death, assets owned by the decedent get a step-up in basis to the Fair Market Value (FMV) on the date of death. This means that gains when the assets are sold are calculated using the FMV on date of death, not on what the decedent paid on it. The Biden proposal eliminates this provision and gains and taxes will be based on the decedent's basis (what he or she paid for it plus improvements). I won't go into the compliance issues this raises, but just imagine trying to calculate the basis of your parent's house. And oh, by the way, since the house wasn't yours the $500,000 primary residence exclusion won't apply.

Like the increase in taxes on Capital Gains, there is an exclusion and it looks like it will be a couple of million dollars in gains. But a business that was owned by the decedent, that may have very low basis, or a house that was owned for a very long time combined with other gains from investments could easily exceed the threshold.

But, it gets worse. The tax on the gains is due when the assets are received (either as an inheritance or gift). If you inherit something above the threshold, you owe taxes before you recognize any income!

We'll see how this one plays out and there isn't much you can do about it. But, permanent life insurance to pay the taxes, may come back into style. Just a thought.

Military Finances are Different

While  these particular tax changes won't affect Active Duty Servicemembers, they certainly could affect retired Senior Military Officers and NCOs with high income. I think some professional help that understands the tax law and your military and veteran benefits could really come in handy. If you'd like to chat about our services give us a call or use the button below to schedule a no-cost initial consultation.

If you found this article useful, you might like the following blog posts:

Military Finances 201: Changes to the Child and Dependent Care Credit for 2021

Military Finances 401: Delaware Statutory Trusts. Another Choice for Rental Property Sales

Military Finances 301: The 10-Year Real Estate Suspension

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