The President and Congress are expected to negotiate tax reform in the fall of 2021. Some of you may be impacted so we want you to know the latest. If it passes, it is to be implemented as part of next year's federal budget.
According to the Tax Foundation, the tax proposals contained in the Biden
administration’s fiscal year 2022 budget, including the American Families Plan (AFP)
and American Jobs Plan (AJP), would levy $2.3 trillion in new taxes on high-income earners and businesses and provide $998 billion in refundable tax credits to low and middle-income households, for a net tax increase of $1.3 trillion.
Change in capital gains taxation. The APF proposes to change the “step-up in basis” rule. When someone dies, their assets transferred to the family members is received at its
market value, meaning that the beneficiary receives it with a new basis. This rule
called step-up in basis has enabled families to pass property down from one
generation to another without paying any capital gains tax. The capital gains from the
purchase of the property by the decedent to the transfer of assets upon date is not
The proposed tax rule provides for an exemption of $1 million on the capital gains
taxation upon death. So, if the decedent transfers assets that have a total of more
than $1 million of unrealized capital gains, the heirs will pay a 39.6% tax for any
unrealized capital gains received that is above $1 million.
There are two exceptions to this new rule: (1) family-owned farms passed down
will be protected with respect to this change, and (2) property gifted to charities.
Change in the real estate capital gains re-investment exception (“1031
exchange”). The plan would limit the present law real estate tax break for “like-
kind exchanges” that allows real estate investors to defer taxation when they
exchange real property. Under the plan, the deferral would end for capital gains in
excess of $500,000.
Change in the carried interest for partnership. The Biden plan also would close
the “carried interest” loophole that partners who are employed by private equity
and hedge funds, as well as other investment partnerships, claim allows them to
receive their partnership interests tax-free and to pay only capital gains tax when
they dispose of their interests, thereby never paying ordinary income tax rates.
No proposed changes for the current Estate Tax. In 2021, the federal estate and
gift tax exemption is $11.7 million with a tax rate up to 40%. This law will “sunset”
on December 31, 2025. Starting January 1, 2026, the exemption will return to
$5.49 million adjusted for inflation, which means it may be about $6 million.
President Biden's campaign included a plan to reduce the exemption to $3.5 million
with an increased maximum tax rate of 45%. This campaign plan is not part of the
tax fall proposed reform.
As the tax plan progresses, we will keep you updated. Meanwhile, please contact us if we can answer questions about how you could be affected.
Yahne Miorini, LL.M