Biden's Plans to Impose an Income Tax on Death

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President Biden has lots of tax proposals. They are dead on arrival in an election year. However, taxes will be a top issue in 2025. 

Biden is starting to lay the groundwork ahead of a looming fight on the fate of the tax changes in former President Trump’s 2017 tax reform law, many of which will expire at the end of next year. We’ll look at one of Biden’s thorniest ideas. 

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Currently, a decedent’s unrealized gains aren’t hit with income tax at death, and heirs get a step-up in basis in inherited assets equal to fair market value. Biden wants to end the effects of the stepped-up basis for wealthy individuals. His proposal generally doesn’t adopt carryover basis, by which the heir would take the same federal tax basis in the inherited assets as the decedent. 

It would instead treat death as a realization event for income tax purposes — essentially a deemed taxable sale of the decedent’s capital assets at fair market value, with capital gains and losses reported on the decedent’s final income tax return. The heirs would continue to get a fair-market-value basis in assets they receive. Gifts would also be treated as a realization event for income tax purposes. 

Unlike the current law, the donees would take a fair market value in gifted property. There is a $5 million lifetime gain exclusion. Plus other exceptions:

• Property left to a surviving spouse wouldn’t be taxed until that spouse’s death, but the spouse would take a carryover basis in those assets. 
• Charitable donations would be exempt. 
• Family-owned businesses would escape tax if the heirs run them. 
• The existing gain exclusion of $250,000 (or $500,000) on sales of primary residences would continue to apply. 
• Gain on tangible personal property left to heirs, such as household furnishings and personal effects, would be exempt from the regime. 
• Also, heirs can opt to pay the decedent’s income tax over 15 years on nonliquid assets.

Let’s illustrate the current rules and Biden’s proposal with a simple example: When Amy’s dad dies, she inherits stock that her dad bought years ago for $300,000 that is now worth $7 million. 

Under current law, the $6.7 million stock appreciation isn’t subject to income tax, and Amy takes a $7 million tax basis in the shares. Six years later, Amy sells the stock for $7.5 million. Amy pays tax in the year of sale on her $500,000 gain. 

Under Biden’s proposal, the stock would be deemed sold upon the dad’s death. Assuming he hadn’t used up any of his $5 million exclusion, the dad’s final federal income tax return would reflect a gain of $1.7 million ($6.7 million minus the $5 million exclusion) and would show tax due from the deemed sale. 

Biden also calls for nearly doubling the capital gains tax for upper-incomers by taxing gains as ordinary income to the extent taxable income exceeds $1 million. His realization regime detailed above would act as a backstop so that taxpayers subject to high tax rates while alive wouldn’t hold onto assets until death to escape tax.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.