President Joe Biden has always pledged not to raise taxes on households earning less than $ 400,000 a year.
Whether his tax proposal keeps or breaks this promise depends on his frame of reference.
The main issue is how an observer views a taxpayer earning less than $ 400,000 who has exceptional income, according to tax experts.
This can come from the sale of a house, business, stock, or other asset – whether living or upon death – that has appreciated in value considerably.
Consider a hypothetical family that regularly earns $ 200,000 per year over two decades:
Taxes would likely not increase for that household during that time frame, other things being equal, if Biden’s plan were passed, experts said. However, the following year, what if the same family sells a highly regarded business for $ 2 million? That would likely trigger a higher capital gains tax rate that year, according to Biden’s proposal.
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This scenario raises a fundamental question: should the public consider such a taxpayer to be in the category of persons earning less or more than $ 400,000?
Based on a strict reading of Biden’s pledge, higher taxes for this hypothetical family (in the year the company is sold) would not break the president’s promise, tax experts say . The family’s total income for the year would be $ 2.2 million, well above the $ 400,000 mark.
This is the lens through which the White House views Biden’s tax plan.
“As per the president’s campaign proposal, individuals and families earning less than $ 400,000 will not see their taxes increased,” according to a White House official.
However, some observers might view the tax increase for this hypothetical family as breaking the “spirit” of engagement, said Jeffrey Levine, director of planning at Buckingham Wealth Partners in Garden City, New York.
These taxpayers had historically earned less than $ 400,000 and spent years building up equity in the business, said Levine, a chartered accountant and financial planner. The proceeds from the sale could also be the family’s biggest source of retirement savings, he said.
Of course, Levine said, this scenario would not be a technical violation of Biden’s campaign pledge and would only apply to a tiny fraction of taxpayers.
“So many changes [the administration is] speaking, they’re all geared toward those who make over $ 400,000, “he said.” They’ve done a solid job of keeping that campaign promise. “
Biden Tax Plan
Biden’s tax proposal would likely affect the aforementioned taxpayers via a higher capital gains tax, which is paid on the appreciated value of an asset.
The Biden administration aims to raise taxes on the wealthy to fund national initiatives, like additional years of free education and expanded tax credits, in the U.S. plan for families. The benefits would largely accrue to low- and middle-income households.
The president would increase the capital gain rate to 39.6%, against 20% currently, for assets sold after more than a year of ownership. (It would be the same top tax rate as regular income.)
It would only apply to taxpayers whose adjusted gross income exceeds $ 1 million – the richest 0.3% of taxpayers.
And only the portion of income or earnings over $ 1 million would be taxed at the highest rate of 39.6%, according to a White House official.
The administration would also change the rules regarding how assets are treated on the death of a taxpayer.
Specifically, death would be treated as a “realization” event. Assets with more than $ 1 million in capital appreciation would be treated as if they were sold – and subject to capital gains tax. (This would apply to married couples with at least $ 2 million in earnings.)
Currently, appreciated assets are not subject to capital gains tax on death. Heirs receive stocks, houses, and other assets at their current market value and only pay tax on subsequent gains if they sell.
The first million dollars for single taxpayers ($ 2 million for married couples) would be excluded from Biden’s tax on unrealized capital gains. Single and married taxpayers could exclude additional earnings of $ 250,000 and $ 500,000, respectively, for a primary residence.
There are limited scenarios in which the taxation of unrealized gains on death would affect taxpayers who earned less than $ 400,000 in the year of their death, according to Howard Gleckman, senior researcher at the Urban-Brookings Tax Policy Center.
For example, this could apply to a person who bought a lot of Microsoft stock in the 1980s and held them until his death, but who lived on a modest income from Social Security and retirement, according to Gleckman. .
“He’s the guy who would fall through the cracks and end up paying tax even if he made less than $ 400,000 in the last year of his life,” he said.
These situations would only apply to 0.6% of taxpayers earning $ 200,000 to $ 500,000 in the year of their death, according to an analysis by the Tax Policy Center.
“We’re talking about relatively few people,” Gleckman said. “But it’s not zero.”
Of course, these taxpayers would have died; higher taxes may not matter much in these cases from a practical standpoint. But they might leave a smaller estate to the heirs, as the assets had to be sold to pay the additional tax. (There are, however, mechanisms like insurance to prevent such an outcome.)
And the Biden administration offers certain exemptions to mitigate the impact of a capital gains tax on death. For example, some family-owned and family-operated businesses should not pay tax until the business ceases to be a family business.