Joe Biden plans to raise your taxes, here’s how

President Joe Biden’s 2023 budget is full of planned tax hikes. These proposals haven’t become law yet, but this is what awaits you if the Biden administration’s string of ambitious tax hikes become law as the government hopes. First, he wants to increase tax rates for individuals. The highest bracket for individuals was 39.6% for many years, until Donald Trump and a cooperative congress lowered it to 37% from 2018 onwards.

But Biden wants it to go up again, from 37% to 39.6%. The 2.6% rate increase would start at $450,000 for joint filers and $400,000 for individual taxpayers. He then wants to tax some capital gains as ordinary income, if you make more than $1 million. What about long-term capital gains? Currently, the highest capital gains rate is 20%, but you need to add in the Obamacare tax of 3.8%. So that makes the total of 23.8%, which is still much better than 37% or 39.6%.

However, one of Biden’s proposals is to tax long-term capital gains and qualifying dividends as ordinary income if your taxable income exceeds $1 million. Say you make a big profit, a price jump from 23.8% to 39.6% will hurt. Of course, most people have to add their state income tax on top of that, like California’s 13.3%.

But here’s an even bigger change, a real change when it comes to your taxes. Biden has proposed withdrawing the step-up on the basis of death. Under current law, inherited property receives a full tax base for its fair market value upon death. The step-up in basics provides tax benefits for anyone passing on valued assets, including real estate, stocks, family businesses, and more. Assets held upon death are increased to market value upon death. Small businesses count on this.

With an increase in the base, your heirs can sell real estate they inherit and do not have to pay income tax on the increase in value during the deceased’s lifetime. That long-coveted step into the grassroots would disappear under the Biden administration’s plan. There would be a $5 million exclusion of gains on property transferred by gift, and this would be cumulative. But once you used that up, the step in the base would be gone.

Biden also wants to kill 1031 stock exchanges. Tax-free real estate bartering is everyone’s tax schedule, and you can keep bartering for decades without cashing in. But now Biden wants to withdraw it. The proposal would allow only a limited 1031 deferral provision that would allow for deferral of profits from similar exchanges up to $500,000 on a single tax return or up to $1 million for joint filers per year. Outside of those numbers, however, 1031 would be dead. If lobbyists work hard to maintain the interest-tax advantage, so will 1031. The real estate industry in general and the 1031 industry have a lot of power to exercise.

Biden’s next plan won’t affect too many people, but it’s still a fundamental change in our tax system. His proposal is a minimum tax of 20% if you have $100 million in assets – not income, but assets. Oddly enough, this proposal is one he calls the “Billionaire Tax.” It’s a strange name, as it applies to anyone who has a tithe of a billion dollars. The misnamed billionaire tax would impose a tax of at least 20% on all “income,” another term radically expanded to include unrealized profits.

Essentially, it’s a wealth tax for those with wealth over $100 million. Suppose you have highly volatile assets such as crypto, which rise and fall in value. Even if you don’t sell, that value would be taxed. The proposed law includes a requirement to report all assets and your base to the IRS annually. The determination is complex, and this is only superficial.

However, the change of sea would be to tax only an increase in value, with no triggering event, no sale, nothing. Talk about radical. It sounds a bit like property tax, which determines the value of your property. But any way you look at it, this one is scary, even if most of us will never get close to $100 million.

Biden also wants to tax transferred interests (in partnerships and LLCs) as ordinary income. The interest borne, which is now taxed as a capital gain, has been on the chopping block a few times in the past. This huge tax advantage has been fiercely defended by hedge funds, private equity funds and others. There’s a lot of money behind that capital gains tax bias, but on technical grounds it’s a little hard to justify. So far, every time Congress has gone after them, they’ve been stopped, so maybe that will happen again here.

Robert W. Wood is a tax lawyer and managing partner at Wood LLP. He can be reached at
[email protected]

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