Potential changes to Biden’s income tax and transfers

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On April 28, 2021, in a speech to a joint session of Congress and a backgrounder released by the White House, President Biden outlined the “America’s Plan for Families,” the President’s spending plan and a series of tax changes to pay it off. . The tax changes proposed by President Biden would include tax cuts and extended credits for some taxpayers, as well as increased tax rates and the application of the IRS for Americans earning more than $ 400,000.

The changes proposed by the president are the latest in a series of proposals from Democratic lawmakers. Other plans have been proposed by Senators Bernie Sanders, Elizabeth Warren and Chris Van Hollen. It will likely be several months before any of these proposals go through Congress and, if the legislation is actually enacted, the final details might look different from the ideas currently being presented.

1. The American Family Plan, President Joe Biden

Increase in tax rate. Under the American Families Plan, the top marginal tax rate would drop from 37% to 39.6% for taxpayers earning more than $ 400,000 per year. In addition, taxpayers earning more than $ 1 million would pay a capital gains tax at the rate of 39.6%. It is not clear how these thresholds apply to single taxpayers compared to married couples who file jointly.

The American Families Plan would also apply the 3.8% Medicare tax more “consistently” to those earning more than $ 400,000 a year.

President Biden’s plan would close the “deferred interest gap” and require hedge fund partners to pay taxes on deferred interest at ordinary income rates.

Taxes on death. Under current law, the cost base of property owned by a deceased person becomes its fair market value on the date of death. This has the effect of eliminating any lifetime capital gain on a valued asset. The American Families Plan would eliminate this “base increase” rule for capital gains greater than $ 1,000,000 per taxpayer ($ 2,500,000 for married taxpayers, when combined with the exclusion of capital gains. existing capital for main residences). The backgrounder says the plan will ultimately include protections for heirs who will continue to operate family businesses, suggesting that the death or donation transfer would result in a deemed sale for capital gains purposes under the plan. Biden. The gain associated with any deemed sale on death is expected to be reported on the deceased’s final income tax return.

The current version of President Biden’s proposal is silent on changes to federal inheritance, gift, or generational transfer taxes, all of which are assessed based on the fair market value of the transferred assets, not earnings. A capital gains tax on death could therefore coexist with existing transfer rights.

Enforcement. The American Families Plan would increase reporting requirements for financial institutions and increase the investment of resources in IRS enforcement against taxpayers with more than $ 400,000 in income.

2. For the law on 99.5%, Senator Bernie Sanders

Annual exclusion. The current annual exemption from gift tax allows each donor to make annual gifts of up to $ 15,000 to an unlimited number of recipients without gift tax. The Sanders plan would reduce the annual exclusion of any single beneficiary to $ 10,000 with an aggregate limit to all beneficiaries in a year of $ 20,000.

Transfer taxes. The current exemption from gift, estate and GST taxes is $ 11.7 million. The Sanders plan would reduce the gift tax exemption to $ 1 million and reduce the estate and GST exemptions to $ 3.5 million. In addition, the tax rates for gifts, inheritance and GST would increase and tax brackets for gifts and inheritances would be introduced. Currently, these taxes are assessed at a flat rate of 40%.

Tax brackets on donations and proposed inheritances:

On

But not finished

99.5% Law

$ 3,500,000

$ 10,000,000

45%

$ 10,000,000

$ 50,000,000

50%

$ 50,000,000

$ 1,000,000,000

55%

$ 1,000,000,000

65%

Note: GST is assessed at the maximum federal estate tax rate. Therefore, all GST taxes would be assessed at a flat rate of 65%, if corresponding brackets are not introduced in the GST tax.

Constituent Trusts and FREE. New settlor trusts (trusts that for income tax purposes are considered owned by the person who funded them) would be included in the settlor’s taxable estate upon death. New donations or sales made to existing transferor trusts would also be included in the transferor’s taxable estate. Older trusts would be grandfathered as long as no further contributions are made. This change would render several popular “estate freeze” techniques ineffective and would have a significant impact even on common trusts such as irrevocable life insurance trusts.

The Sanders plan would also impose additional requirements on Grantor Retained Annuity Trusts (“Libres”). A FREE allows a grantor to transfer an inordinate appreciation in the value of fundraising assets to family members, often while giving gifts of little or no value for gift tax purposes. The annuity paid by the FREE should be paid for at least ten years and the residual interest should have a value equal to the greater of 25% of the assets contributed or $ 500,000. This requirement would eliminate the use of the “reset” FREE.

GST exempt trusts. The Sanders plan would eliminate multigenerational “dynasty” trusts by requiring that any new trust end no later than fifty years after its creation to be exempt from the GST. Existing GST-exempt trusts would lose their exempt status 50 years from the date of enactment.

Evaluation discounts. The Sanders plan would eliminate valuation discounts for “non-business assets” if the transferee and its family members have controlling or majority ownership of the entity. Non-business assets are defined as any asset not used in the active conduct of a trade or business.

3. 2021 ultra-millionaire tax, Senator Elizabeth Warren

Senator Warren’s plan would introduce a wealth tax into the Internal Revenue Code. The plan would impose a 2% annual tax on household and trust equity valued at over $ 50 million and an additional 1% annual surtax on households and trusts valued at over $ 1 billion.

4. Sensible Taxation and Promotion of Fairness Act 2021, Senator Chris Van Hollen

Senator Van Hollen’s plan would treat any property transferred by gift, trust or death as being sold at fair market value to the assignee on the date of the gift, death or transfer. The exemption for such a gain would be $ 1 million.

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President Biden’s plan did not indicate the effective dates of any of his tax reform proposals. The effective date of any proposal enacted this year can likely be any date between enactment and January 1, 2022. While it is possible that enacted reforms could be made retroactive, such a step would be rare.

PC Goulston & Storrs 2021. Revue nationale de droit, volume XI, number 132

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