President Biden’s Tax Plans for Individuals

With Democrats’ control of both the House and Senate, many of President Biden’s tax policy change proposed during his campaign is likely to sweep through Congress.  Some of the revenue raising proposals affecting high-income individuals are summarized below:

Tax Rate Increase

An increase of top individual tax rate from 37% to 39.6% for taxpayers with adjusted gross income above $400,000.

Increase of Capital Gains Tax Rate

President Biden plans to increase the long-term capital gains and qualified dividend tax rate from 20% to ordinary tax rate of 39.6% for individuals with adjusted gross income exceeding $1 million.

Ultra-Millionaire Wealth Tax

Ultra-Millionaire Wealth Tax Act was introduced by Democratic Senator Elizabeth Warren in March which would impose a 2% annual wealth tax on taxpayers with at least $50 million in wealth and a 3% tax on those with at least $1 billion in wealth.  The Wealth will be determined based on the fair value of properties includable in one’s estate.

Estate Tax Increase

Senator Bernie Sanders and Senator Sheldon Whitehouse introduced the 99.5% Act in March which would significantly increase the estate and gift tax.  If enacted, it will change the current estate and gift tax laws by (1) reducing the estate tax exemption to $3.5 million from $11.7 million per person, pulling vast majority of individuals to subject to the estate tax; (2) reducing the lifetime gift tax exemption to $1 million and annul gift exclusion amount to $10,000 per donee; and (3) increasing estate tax rate from 40% to 65% for estate in excess of $1 billion.

Tax on Unrealized Gain

Under current law, capital gains tax on appreciation of property gifted or bequeathed is postponed in the case of gift or eliminated by the step-up basis.  However, Democrats introduced a bill that would tax appreciated property at the time of transfer by gift or death.

High net worth and income individuals are likely to face significant changes to their income tax and estate tax plans if some of these proposals are enacted.  Therefore, high net worth and income individuals should monitor legislative progress, understand the impact, and consider planning in advance to minimize the impact.