The Biden administration has outlined a series of tax changes that would raise the burden on high‑income earners, investors and owners of appreciated assets. If enacted, these measures would reverse several decades‑old tax breaks and could affect anyone with a net worth or income above certain thresholds.
1. Higher top marginal income tax rate
- Current top rate: 37 % (reduced from 39.6 % by the 2017 Tax Cuts and Jobs Act).
- Proposed rate: 39.6 % – a 2.6‑percentage‑point increase.
- Applies to: joint filers with taxable income ≥ $450,000 and single filers ≥ $400,000.
2. Capital gains taxed as ordinary income for incomes above $1 million
- Existing long‑term capital‑gain rate: 20 % plus the 3.8 % net‑investment‑income tax (total 23.8 %).
- Proposal: treat long‑term gains and qualified dividends as ordinary income for taxpayers earning >$1 million.
- Resulting marginal rate could exceed 50 % for high‑income residents of states with additional taxes (e.g., California’s 13.3 % rate).
3. Repeal of the “step‑up in basis” at death
- Under current law, inherited assets receive a new cost basis equal to their fair market value at the decedent’s death, eliminating capital‑gain tax on appreciation that occurred during the owner’s lifetime.
- The proposal would eliminate this step‑up, meaning heirs would owe capital‑gain tax on the full appreciation when they later sell the asset.
- A $5 million exemption from gain on inherited property would remain, but once exhausted the step‑up would be gone.
4. Minimum 20 % tax on unrealized gains for ultra‑wealthy
- Targets individuals with net worth ≥ $100 million.
- Imposes a 20 % “minimum tax” on all income, including unrealized capital gains (assets that have increased in value but have not been sold).
- Requires annual reporting of asset values and basis to the IRS.
- The threshold could be lowered in future revisions, potentially expanding the tax base.
5. Repeal of the carried‑interest exemption
- Carried interest—profits earned by hedge‑fund and private‑equity managers—are currently taxed at the capital‑gain rate (20 % plus NIIT).
- The proposal would recharacterize carried interest as ordinary income, subjecting it to the top marginal rate (potentially 39.6 %).
6. Restriction of Section 1031 like‑kind exchanges
- Section 1031 allows investors to defer capital‑gain tax by swapping real‑estate properties of “like kind.”
- The plan would limit the deferral to $500,000 for single filers and $1 million for joint filers each year; gains above those amounts would be taxed immediately.
- The change would eliminate the unlimited rollover benefit that many real‑estate investors rely on.
Potential implications
- Higher effective tax rates for high‑income earners, especially those in high‑tax states.
- Increased capital‑gain liability for heirs and for owners of appreciated assets who do not sell.
- Greater compliance burden due to required annual asset reporting for ultra‑wealthy individuals.
- Reduced attractiveness of U.S. real‑estate investment if the 1031 deferral is curtailed.
Practical considerations
- Tax‑planning strategies that previously relied on step‑up in basis, carried‑interest treatment, or unlimited 1031 exchanges may need to be revisited.
- Some advisors suggest diversifying assets internationally or exploring residency options that offer more favorable tax regimes, though such moves must comply with reporting requirements and anti‑avoidance rules.
- Monitoring the legislative process is essential, as any of these proposals could be modified before becoming law.
