By: Lee Osborne, CPA, CFE, President, Osborne Rincon CPAs
As voters consider their picks for the November 2020 election, one of the issues often of interest is how taxes may change under a new administration.
Should Joe Biden win the election, he has proposed a raise of capital-gains tax to 39.6% from today’s 23.8%. President Trump has stated that he is seeking a rate of 15%.
President Obama and Joe Biden called for general tax increases on high-income households in 2008 and 2012. In review of President Trump’s tax cuts, Democrats are proposing to reverse many of those on top earners, according to an article in the Wall Street Journal. The Journal also reported that Treasury Secretary, Steven Mnuchin, has said that capital-gains rates should be reduced for the next few years to encourage investment.
Biden has proposed a fundamental transformation of capital-gains tax rules, suggesting that investment income and ordinary income face the same top tax rates which hasn’t happened since 1990. People would pay income taxes on unrealized gains at death. That would change the current law, which exempts those gains and imposes taxes only on the difference between the value at death and the value when later sold by heirs.
Currently, someone who dies with appreciated assets isn’t liable for income taxes on the difference between what those assets originally cost and what they were worth at death. Instead, heirs only pay taxes on gains that occur after the original owner’s death and only then if they sell assets.
Consider someone who bought stock for $1 million in 2010 and dies in 2021, when the stock is worth $3 million. Under current law, that person would owe no capital-gains taxes on a final income tax return, and heirs would only owe taxes on gains above the $3 million value after they were to sell the assets. Under Biden’s plan, the $2 million gain would be treated as income when the person dies, triggering a nearly $800,000 tax bill even if there were no sale.
In general, estimates in Biden’s tax proposal assume that individual tax cuts would lapse as scheduled at the end of 2025, which would mean tax increases for most households. For someone who is wrapping up their work years and has sold their business and properties for retirement, they could have to pay 60% in federal and state income taxes.
There are many issues to consider in the upcoming election. Stay informed on those that will affect you most.
If you have any questions, consult with your tax advisor or give us a call at (760) 777-9805.