March 30, 2022

The Impact of Biden’s Proposal to Tax the Rich

Bill Seyfarth, VP Relationship Manager (Portfolio Solutions Group)

When the White House first proposed the American Families Plan in April 2021, many viewed the proposed tax code changes as a starting point for a long negotiation process amongst members of Congress. On Monday, President Joe Biden made a fresh effort to persuade Congress to take steps to overhaul the tax code and squeeze more revenue from the largest companies and the wealthiest households. While many of the features of Biden’s original plan are included, the number of differences between the original plan and the proposed bill indicates that much of the negotiation has already taken place. Therefore, even though the bill has yet to become law, it is especially important for us to remain ahead of curve and proactively plan around future tax legislation.

The tax landscape appears to be shifting once again. The individual and family proposals would eliminate the effects of tax benefits that disproportionately affect high-income individuals, such as:

• Increasing the marginal tax rate while lowering the taxable income thresholds to which the higher rates apply.

• Taxing long-term capital gains at ordinary income rates.

• Treating transfers of appreciated property by gift or on death as realization events.

• Establishing a global minimum corporate tax and the consistent taxation of digital services, with implementation set to begin in 2023.

Uncertainty has been a constant companion for wealth managers long before the global coronavirus pandemic. Understanding that final legislation may look different from the current proposal, it seems clear that we’ll see important changes, from income tax rates to estate transfer policies. We’ve highlighted a few relevant examples below:

Marginal Tax Rate Hikes for High Earners: Top marginal tax rate would return to 39.6% before the scheduled expiration of the 37% top rate in 2026.

Capital Gains Tax Increase: Long-term capital gains and qualified dividends would be taxed at ordinary income rates, increasing the current capital gains tax rate from the current level of 20% if the taxpayer’s income exceeds $1 million ($500,000 for married filing separately).

Gains on unrealized appreciation for noncorporate entities (e.g., trusts, partnerships) that own property (that has not been the subject of a recognition event in the past 90 years) would recognize gain on the unrealized appreciation.

Transfers of Appreciated Property by Gift or On Death: Donor/decedent would realize capital gain on an appreciated asset at the time of the transfer. No stepped-up basis.

Exclusions: Transfers by a decedent to a U.S. spouse or to charity, gain on tangible personal property such as household furnishings and personal effects (excluding collectibles), $1 million per-person exclusion for property transferred by gift or held at death, tax on the appreciation of certain family-owned and -operated businesses would not be paid until the interest in the business is sold or the business ceases to be family-owned and -operated.

Carried Interest Taxation for Alternative Investments: Partner’s share of income on “investment services partnership interest” (ISPI) in investment partnership would be taxed as ordinary income if partner’s taxable income (from all sources) exceeds $400,000. This would be ineligible for reduced rates applicable to long-term capital gains.

The gain recognized on sale of ISPI would also taxed as ordinary income if partner exceeds income threshold.


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