The Biden Administration has proposed an increase in the capital gains tax rate and the elimination of the Step-Up in Basis Law.

Do you know how it might affect your financial plan? 

Proposed Changes in the Capital Gains Tax Rate 

What is a capital gain? 

Profit earned on the sale of an asset is considered capital gain. An asset purchased at $1,000 and sold at $3,000 nets a capital gain of $2,000, and that profit will be taxed. Rates on capital gains are separate from taxes on ordinary income such as wages or pension. 

2021 capital gains tax rates for singles: 

0% on $0-$40,400 

15% on $40,401-$445,850 

20% over $445,850 

2021 capital gains tax rates for married filing jointly: 

0% on $0-$80,800 

15% on $80,801-$501,600 

20% over $501,600 

If the proposed changes go into effect, the capital gains tax rate will jump to 39.6% for those who earn over $1 million. That is almost double the highest rate today and does not account for an additional 3.8% surcharge for high earners to help pay for the Affordable Care Act. 

Even for those who do not regularly earn over $1 million, the sale of a business or land, payment from a buyout or severance, or the sale of a huge position in one stock can all create a one-time event to push you over that $1 million threshold with some significant gains. 

Proposed Elimination of the Step-up in Basis Rule 

This potential change could affect many of us. 

Under current law, the cost basis of an inheritance steps up to the current value so that no capital gains tax is paid on the inheritance. The Biden administration proposes elimination of the rule so that capital gains taxes are due right away. This means that under current law, no capital gains taxes would be due for land that was purchased at $100k and is now worth $1.1 million at time of death. With the proposed changes, taxes due at time of death would jump to $396,000 (39.5% on $1 million in capital gains). 

Planning is still underway, and there is some gray area as to who will be affected. We are speculating that the 39.6% rate will not pass as-is but will be greater than the current 20% for top income earners. The administration also claims that capital gains less than $1 million, or $2.5 million for married filing 

jointly, will be exempt from the elimination of the Step-up in Basis. It will have to go through a lot more process before it is finalized, but start thinking now about how it will affect you. 

Now is the time to set up a consultation with us and make sure you are taking the proper steps to prepare for future changes.

If you have any questions, please don’t hesitate to call us at 844-CARLSON (844-227-5766).