What do Biden’s Proposed Tax Increases Mean for Your Investments?

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Read this Periscope to learn about the President’s proposed tax increases, including a huge increase in the long-term capital gains rate. Also, increases to the income tax rate, the step-up in tax basis, higher taxes on corporations and a gotcha for real estate investors.

Second-largest Percentage Tax Increase in US History

The proposed tax increases, as a percentage of US Gross Domestic Product (GDP), are the largest since 1968.

Source : SunTrust

The tax increases cover a large swath of the economy. In this Periscope, we discuss the ones that might affect individual taxpayers. The spending is nicely summarized in this chart from the NYTimes:

Source: NY Times

Income Tax Increase


President Biden proposes increasing the income tax rates for people earning more than $400,000 in a single year. This increases the highest marginal Federal income tax rate from 37% to 39.6%. But an existing 3.8% tax on long-term capital gains will now also apply to the income tax. Thus the highest income tax rate will rise to 43.4%.

Source: Barrons

Long-term Capital Gains Tax Increase

President Biden proposes raising the long-term capital gains (LTCG) tax to match the income tax rates for anyone who crosses the $1 million level in a single year. In addition, a 3.8% tax applies, so the top rate is 43.4% for long-term capital gains. Currently, the highest LTCG rate is 23.8%. This is the largest increase in the history of LTCG taxes. It is the largest of the President’s proposed tax increases.

Estate Tax Increase

President Biden would keep the personal exemption amount at $11.7 million. There was some talk that it would drop to $3.5 million, the same as it was in 2009. This may come back. As of now, it looks like most estates might not be taxable. Except that when they are, the tax rate increase is bigger. Read more!

Loss of Stepped-up Cost Basis

President Biden would do away with the step-up in cost basis. Upon death, assets are stepped up to their fair market value. Without the step-up, inheritors will have to pay taxes on the difference between the price paid by the decedent and the fair market value. Then, the inheritors must also pay the estate tax on top of that if the estate exceeds the personal exemption. This could take away nearly two-thirds of an inheritance.

Source: Tax Foundation

I wrote about the temporary disappearance of the step-up in basis 11 years ago. It came back and the estate tax disappeared in 2010. This was a one-year flight-of-fancy that caused a lot of headaches. It was also the year George Steinbrenner died, owning the New York Yankees. I guess he really did hate taxes, by avoiding the estate tax he created a lot of work for his attorneys, accountants and the IRS too.

Source: George Steinbrenner

Real Estate Tax Increase

One of the big tax surprises affects real estate. Under President Biden’s plan, only the first half million of appreciation in your home would be exempt from that new, high LTCG tax rate. And, for real estate investors, President Biden eliminates 1031 exchanges. This is a tax-deferred way to sell and purchase real estate, popularized on late-night infomercials. It is also the bread-and-butter of the real-estate industry. This tax increase is unpopular among real estate professionals.

Source: Bloomberg

Corporations Face a Tax Increase

Corporations face an increase in taxes from 21% to 28%. The minimum income tax would be 15%. This affects large multi-national companies who use complex tax mitigation plans to reduce taxes. Not our subject today.

Some of the Biggest Losers

Owners of equities with large gains will have to pay taxes at that high rate—nearly double this year’s LTCG tax rate. Inheritors may have to pay a new 43.4% Federal income tax on their inheritance. Business owners who want to sell their business and fund their retirements may have to pay that same, high tax rate when they sell.

Some Big Winners

The big winners in this deal are the expert professionals who help the biggest losers. For example, investment advisors with all the licenses who can help equity investors consider tax-deferred investments. Attorneys may win big as they help to restructure companies to defer and delay receipt of income to attempt to help their business owner clients stay below the $1 million mark. Attorneys also help all of us who want to save our inheritors from an unnecessary tax. A CPA is a clear winner—although the work becomes daunting to figure out cost basis for grandma’s home, plus improvements, since the day she bought it. Insurance agents may also win with some of the tools in their toolbelts.

In Conclusion

The tax increases are a political football, and subject to change at any time. Unless noted elsewhere, my source for this information is President’s speech on Wednesday April 28, 2021.

About the author

Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.