Somehow those making or changing the tax laws always seem to be able to write them in a way that does not increase their own taxes. Well, it;s happening again.
Yesterday (updated today) The U.K. Daily Mail posted an article about President Biden’s idea for increasing the revenue from capital gains taxes.
The article reports:
President Biden has promised not to raise taxes on anyone earning less than $400,000 but plans to end an inheritance loophole could do just that, according to a new analysis that suggests a widow with nothing to pass on to her children but her home could be badly hit by proposals that would leave the Bidens’ personal fortune untouched.
Tucked away in Biden’s American Families Plan is a revision to the way capital gains taxes are paid on estates when people die.
Critics have dubbed it a ‘middle-class death tax’ and say it will mean thousands of people having to sell assets to meet tax bills they would not get under existing law.
‘The American Families Plan as proposed would impose a new death tax that would punish middle class individuals who chose to invest in America and leave something for their children rather than spend every dollar, said Hank Adler, associate professor at Chapman University and co-author of the new study.
‘The plan does not move the goal posts, it totally changes the rules of the game.’
The article explains how the current tax system works and what President Biden proposes to change. On the surface it looks as if the taxes would only apply to the rich, but when you look into it, middle class families would also be negatively impacted.
The article explains:
At present, capital gains tax is generally imposed on profits when assets are sold.
But for estates worth more than $11.7 million the tax is imposed on what are called ‘unrealized gains’ – that is the increase in value of homes, shares and other assets even if they are not sold.
That means estates worth less than that can be passed on and the increase in home value is reset, so the beneficiary is taxed only when they sell that asset and only on the increase after they inherited it.
Biden last month called this the ‘trust fund loophole.’
‘We need to make a choice to eliminate the loophole,’ he said.
How quickly do you think the value of an estate could be moved down to $1 million or so–a number that in some of our major cities would mean owning a house, a car, and a relatively small stock portfolio. This tax would hit hard to people who have lived in the same house all their lives and had the value of the house increase significantly due to inflation. However, for people like the Bidens, there would be little additional tax because they bought their properties fairly recently. Therefore they would not pay significant tax on their property.
The article notes:
They built their Wilmington, Delaware, home on land bought for $350,000 in 1996. It is now estimated to be worth $2 million.
Their Rehoboth Beach house, also in Delaware, cost $2.7 million in 2017.
That means the total appreciation is likely to be less than the $2.5 million couple’s exemption.
And their estate would pay nothing.
Meanwhile, a New York widow who had lived in the same house for fifty years would leave her children a house and a ridiculous tax burden:
Suppose a widow buys a house in New York for $250,000 in the 1970s.
She never remarries and by the time of her death her only asset is the home.
She leaves her house, now worth $2.5 million, to her children.
Under current law, the estate faces no capital gains tax.
Her children inherit the house at a value of $2.5 million and would only pay capital gains on its sale.
Under Biden’s proposals, the estate would be subject to capital gains tax.
Its increase is $2.25 million, less a $1.25 million exemption, leaving a taxable amount of $1 million.
At 40.8% that would bring a $408,000 tax bill.
Somehow those making the tax laws always seem to be able to avoid paying more taxes.