The US Congress is inching closer to approving a bipartisan proposal for $1 trillion in new infrastructure spending. This makes it more likely that sometime in the second half of the year attention is likely to turn to new taxes to pay for this and another new programs. A key focus of both the Biden administration and Senate Democrats is taxing capital gains at higher rates. (This would be in addition to the 7% capital gains tax that Washington State passed this spring.)
“The changes being proposed by the Biden administration, echoed in a bill proposed by Democrats in the US Senate, are major and historic,” says Kristi Mathisen, LNWM’s Director, Tax and Financial Planning.
Per the Biden budget, the highest capital gains rate essentially doubles for households with more than $1 million in adjusted gross income, and capital gains would be due when assets are transferred, as well as sold. Finally, capital gains taxes would be levied upon death, so heirs would no longer inherit at current market prices.
In her latest paper — Tax Update 2021 — Kristi outlines what is being proposed, how that is likely to affect higher income households, and what we’re advising now for clients.
In addition to the tax proposals in the Biden budget, there are two major tax bills before the US Senate:
• The Sensible Taxation and Equity Promotion Act (STEP) — focuses on long-term capital gains and is very similar to what the Biden administration is proposing, although a bit more stringent. It is backed by five prominent Democratic Senators: Van Hollen, Booker, Sanders, Whitehouse, Warren.
• For the 99.5 Percent Act — focuses on estate taxes. Backed by Senators Sanders and Warren, it would lower the estate and gift tax exemption to $3.5 million vs. $11.7 million currently; raise the highest federal estate rate to 65% (from 40% currently); and limit the discounting of business asset valuations.
Capital gains tax changes: Congress could approve some sort of change to capital gains taxes sometime this year. A key issue is whether the change would apply retroactively to April 2021. Historically, major changes to US tax policy have not been retroactive. And if retroactive, taking action now is not likely to be beneficial.
Estate tax changes: We think higher estate taxes are likely but not this year, since the focus now seems to be on capital gains. The current estate tax exemption expires at the end of 2025, and we could see some aspects of the “For the 99.5 Percent Act” passed before that, if Democrats hold on to Congress.
What to Do Now
If you had already been planning to sell, transfer or gift an asset in the coming year, doing so sooner rather than later makes sense. Now is also a good time to review with us strategies for taking advantage of the higher federal estate tax exclusion.
However, we would not take action now solely to avoid a potential tax rate increase. What is enacted could be very different from what is now proposed, given a divided Congress. The more prudent course is to assess your long-term capital gains exposure and strategies for future transfers and sales, both of which we can help you do. That way, you can be prepared to act when there is more certainty about the legislative outlook. Read Kristi’s tax update.