Senate Democrats propose a capital gains tax on death with a $ 1 million exemption

Senator Bernie Sanders, I-Vt., Speaks at an event in Birmingham, Alabama on March 26, 2021.

Andi Rice / Bloomberg via Getty Images

A group of Senate Democrats issued a proposal Monday to tax unrealized capital gains from wealthy goods upon death.

The plan comes as President Joe Biden prepares to unveil a major infrastructure plan that is expected to be largely funded by higher taxes on businesses and the rich.

The Senators’ Group – Elizabeth Warren, Mass .; Chris Van Hollen, Md .; Cory Booker, NJ; Sheldon Whitehouse, RI; and Bernie Sanders, I-Vt. – proposed abolishing the so-called topping-up and taxing capital gains on unsold assets upon death.

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Under current regulations, assets such as shares can be passed on to heirs without capital gains tax on their increase in value. The wealth is also passed on to the heirs at the current market price, rather than at the owner’s original cost, known as topping up the base.

Senators called the current framework in a discussion draft of the Reasonable Taxes and Equity Incentives Act (STEP) written by Van Hollen as a “government grant for inherited property”.

“It is absurd that our tax laws allow many of the richest people in our country to get away without paying a dime in taxes on millions or even billions of investment income while workers pay taxes on every check they receive,” Sanders said.

$ 1 million in capital gains

The plan seeks to focus the tax on wealthy goods. This could allow individuals to exclude unrealized capital gains of up to $ 1 million from taxation.

Let’s say someone inherits $ 6 million worth of shares that were originally bought for $ 4 million. The tax would apply to $ 1 million of that $ 2 million gain due to the exclusion.

The U.S. is projected to lose nearly $ 42 billion in tax revenue this year if capital gains are excluded from tax at the time of death, according to the Joint Committee on Taxation. It’s likely to cost $ 218 billion in 2020-24, according to JCT.

Such a proposal is unlikely to find much resonance unless the support of the Republicans who have signaled a tax hike is not a novice.

“I’d like to do an infrastructure bill,” said Mitch McConnell, Senate minority leader, R-Ky. “I’m not interested in raising taxes on all of America.

“I think this will steer our economy in the wrong direction,” he added.

Biden’s administration said it would seek tax increases for households earning more than $ 400,000.

The president has also proposed raising the highest income tax rate from 37% to 39.6%. It would tax long-term capital gains for households making more than $ 1 million a year at that rate, rather than the current 20%.

Currently, assets that would be subject to the STEP Act do not necessarily avoid taxes entirely. Individuals may be subject to 40% estate tax on estate values ​​greater than approximately $ 11.2 million.

The STEP Act would not double tax such estates as the income tax paid on the bill would be deductible for estate tax purposes. The bill also contains rules to prevent the use of trusts to avoid the tax.

In addition to the $ 1 million capital gains exemption, an additional exclusion of up to $ 500,000 would continue to apply to personal housing offered under applicable law. Assets held in retirement accounts would continue to be exempt from capital gains tax. Charitable gifts and rebates would also be excluded.

The legislation allows taxpayers to pay the tax in installments over a period of 15 years on capital gains applicable to illiquid assets such as a farm or business.

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