Biden's proposed tax rule could seize billions from wealthiest estates at inheritance
Biden's plan to close the step-up loophole could have significant consequences for some of the wealthiest Americans
President Biden's plan to increase tax rates on inherited wealth could seize billions from some of the richest fortunes at death.
Under current law, when heirs inherit an asset that has appreciated in value, they get a "step-up" in basis, meaning they receive the holding at its current market value. Beneficiaries can sell those assets and pay capital gains based only on the time they receive the asset and the time they sold it, allowing them to minimize the tax penalty.
But Biden wants to close that loophole – a proposal that could have significant consequences for some of the wealthiest people in the country.
WHAT BIDEN'S CAPITAL GAINS TAX PROPOSAL COULD MEAN FOR YOUR WALLET
For instance, Amazon CEO and founder Jeff Bezos' heirs could owe as much as $36 billion if the president succeeds with his plan to crack down on the tax-free transfer of fortunes at death, according to calculations by Bloomberg News. Whoever inherits the Amazon shares that Bezos bought in 1994 for $10,000 – now worth roughly $180 billion – would have to pay taxes on the difference between the selling price and the initial buying price.
Bezos has an ex-wife, a girlfriend and four children.
A change in the step-up basis wouldn't be quite as costly for Bill and Melinda Gates, who announced on Monday that they would be divorcing. While the Gates fortune is worth an estimated $145.8 billion, it's older, and the couple has already donated or sold many of their Microsoft shares.
It's unclear how the couple plans to split their remaining $26 billion stake in Microsoft once the split is finalized. The Gateses have three children.
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Congress estimates that stepping up the basis of inherited assets costs the government about $43 billion a year. Eliminating the practice – coupled with raising the top statutory rate on capital gains from 20% to 39.6% – would generate an estimated $113 billion in new revenue over the next decade, according to recent findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School.
The money would go toward funding a massive expansion of the social safety net, including establishing universal pre-kindergarten, free community college, paid family leave and tax credits for low- and middle-income households.
"While the headline tax rate increase to 39.6% will catch eyes, the magnitude of the tax increases proposed on wealthy individuals is really in the details," said Brad Sprong, partner and private enterprise tax leader at KPMG. Sprong said the elimination of the "step-up" in basis at death would have a "substantial impact" on individuals, resulting in a tax rate of nearly 65% for the richest Americans.
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Still, the proposals face a steep hill to passage, even though Democrats control both chambers of Congress. Many moderate members of the president's party are likely to push back against his proposal to equalize the tax on capital gains and normal income, as well as his plan to eliminate the step-up. Republicans have already panned the proposal, with Senate Minority Leader Mitch McConnell, R-Ky., predicting that no GOP senator would support the measure, known as the American Families Plan.
What's more, many critics suggest that rich Americans would find other means of dodging the tax. Penn Wharton economists suggested that tax avoidance, most of it legal, would cut about $900 billion of the estimated $1 trillion that a capital gains tax increase could generate for the federal government.