Joe Biden's American Family Plan could hit middle- and lower- income Americans hard
Biden has been advocating that we get rid of the “stepped up basis on death” that has long been a part of American tax law. Such a move could hit middle-, and even lower-, income Americans hard.
4/23/21 UPDATE: Biden has begun to leak details of how he plans to pay for his American Family Plan. As I wrote a month ago, as things currently stand, Biden wants to eliminate the stepped up basis on death. Per the NYT:
The president will also propose eliminating a provision of the tax code that reduces taxes for wealthy heirs when they sell assets they inherit, like art or property, that have gained value over time.
And for the record, while the NYT reporter, Jim Tankersley, claims that the stepped up basis is only for “wealthy heirs,” in fact it impacts anyone who inherits their parents’ home or investments. As I note below, a working-class neighbor of mine in DC, who can’t even afford her prescription meds, lives in the home that her grandparents once owned — and she eventually inherited — and she plans to bequeath it to her children. She and her family benefited, and her children will benefit, from the stepped up basis on death, and they’re not “wealthy heirs.”
And, as I note below, a decent number of middle-income, and even lower-income, Americans own their own home. If the stepped up basis is eliminated, it will hit all of them with a substantial new tax.
3/12/21 UPDATE: The New York Times agrees with me.
Elimination of the step-up rules could capture billions in taxes from the rich but hurt some people who do not have enormous wealth. Consider a hypothetical couple who bought their home 40 years ago for, say, $75,000, paid the mortgage, maintained the yard, made some upgrades and now find themselves with a house worth $300,000 or more. For many families, a house like that forms the basis of a modest estate to pass to heirs. Now, if heirs ever sell that house, they will be responsible only for gains above $300,000; if the step-up in basis were eliminated, they would owe taxes on any amount above the original $75,000.
For a while now, Joe Biden has been advocating that we get rid of the “stepped up basis on death” that has long been a part of American tax law. Such a move could hit middle-, and even lower-, income Americans hard. Here’s why.
The stepped up basis on death applies to property you inherit. That could be stocks (outside of retirement accounts). Or it could be your family home or apartment. What the stepped up basis does is protect you from having to pay capital gains taxes on the property you inherit. (Note, I’m talking about capital gains taxes, not inheritance taxes.)
Let me give two examples.
Stocks
You buy $5,000 of Apple stock in 2010. The stock value reaches $20,000 in 2021, and you’ve therefore made a $15,000 profit, or capital gain, on your $5,000 investment. You then have to figure out what federal and state capital gain taxes you owe on the $15,000 profit. Since this is a long-term capital gain, i.e., held for more than one year, the federal capital gains tax is either 15% or 20%, depending on your overall income. The state tax is very often your state income tax rate — in DC that’s anywhere from 4% to nearly 9%. (It also should be noted that if you make under $40,000 per year, your federal capital gains rate is zero, UP UNTIL the profit from the stock pushes your income over $40,000, then you pay capital gains tax on anything over $40,000.)
So, if this were me, a DC resident, I might owe as much as a 29% tax on the inherited stock, or $4,350.
Complicated, no?
But if you inherit the stock — say your mom gives it to you on her death, you won’t owe any capital gains at all, federal or state, so long as you sell the stock immediately. Why? Because of the stepped up basis on death.
What the law says is that when you inherit property, the capital gains on that property — the profit, as it were — is reset to zero. So the IRS considers the $20,000 of inherited stock as if you just bought it, and you so far have no profit on it at all. So you owe no federal or state capital gains tax unless and until the stock rises and there’s some new profit, or capital gain, on the stock. Any new profit, or gain, over the $20,000 basis, as it’s called, will be taxed.
President Biden wants to get rid of this inheritance rule, and simply tax all inheritance property at the time of death of the person making the gift.
Homes
The same thing applies to homes. Your parents buy a home for $75,000 in 1970. Your parents die in 2021. The home is now worth $600,000, and you inherit it, per your parents’ will. Under existing law, even though the capital gain (the profit) on the home is $525,000*, you will pay no capital gains taxes if you sell the home immediately, because the IRS consider the gain/profit wiped out at the time of your last parents’ death, and reset to the current value of the home, $600,000.
Capital Gains tax burden: Zero.
(*As always, it’s a bit more complicated than this, even, because if your parents owned the home jointly, and one preceded the other in death, the stepped up basis rule would wipe out the one parents gain when the other parent inherited the property, leaving only the second parent’s gain. So the total capital gain on the property at the last parent’s death would be less than $525,000. Nonetheless, the remaining gain won’t be taxed under current law at all because of the stepped up basis rule.)
Under what Biden is proposing, your parents’ home will be immediately hit with a 20% capital gains tax, and state income tax, on their death. (And maybe even the ACA and Medicare taxes too.) In DC, that means, again, 20% plus nearly 9%, or a 29% tax on a home that you otherwise were going to receive tax free — or $152,250 in taxes. (And again, there may be additional ACA and Medicare taxes as well.)
That’s zero in taxes under current law, versus over $150,000 under Biden’s proposal. That’s a lot of money.
Even middle- and lower- income Americans could be affected
I’ve befriended a woman down the block from me in DC. She’s 60, living on disability because of her illnesses, and has a hard time finding the money to even pay for her prescriptions. I once mentioned to her that she could consider a reverse mortgage, as she surely has a lot of equity locked up in the house. She said no way, this house has been in her family for generations, she could never give it up, even after death — she wants her family to inherit the family home and live there for generations.
Under Biden’s plan, it’s hard to see how that would be possible. Let’s assume her parents or grandparents paid $75,000 for the house (and I suspect they paid even less, as DC wasn’t expensive at all back then). According to Zillow, her home is now worth $720,000. That’s a $645,000 profit, or capital gain. Normally, her heirs would pay no capital gains tax when they inherit the house. Under Biden’s plan, they would be hit with a 29% tax, costing them $187,050. (As always, it’s more complicated than this, but you get the idea — the tax isn’t insignificant.)
That’s a heck of a lot of money to a middle- or lower-income family.
But it’s worse than that. Biden has said he wants the tax owed on the death of the owner. That means, her family — or her estate — will owe $187,050 the moment she dies. Where are they going to get that kind of money? They’re going to sell the house, of course. The house that she so wanted to keep in her family, she refused to use it buy the drugs she needs to stay alive.
Lower- and Middle- income Americans do own stocks and homes
A third of Americans own stocks outside of retirement plans. The breakdown, according to PEW, shows that 14% of lower-income Americans own stocks, bonds, or mutual funds outside of an investment account, while 38% of middle-income Americans own the same. These are the people who could now owe inheritance taxes under Biden’s plan. Yes, the rich are an even greater number, but lower- and middle- income is hardly insignificant.
As for homes, nearly 66% of Americans own one. By race: 73% of white non-hispanic Americans own a home; 47.5% of Latinos; and 42.1% of Blacks. Again, that’s not a small number of people being impacted by this change in the tax law.
As for how this applies to income, according to the Urban Institute, some low-income Americans do in fact own homes — far more whites than Blacks, however — but still, nearly 1/4 of Blacks earning less than $25,000 own a home, and a bit more than 1/3 earning between $25,000 and $50,000 own a home. Again, that’s not an insignificant number.
The Republicans have been irresponsible with the deficit for decades. Every time a Republican is elected president, the deficit soars. A Democrat then comes in and tries to fix things. But it is patently unfair to propose something that is a huge tax on middle- and lower- class Americans.
And for anyone who says “Biden would never do that,” consider that Barack Obama proposed this very thing — to eliminate the stepped up basis at death — for any property valued at over
We live in a country where the pensions of our fathers and grandfathers no longer exist. For most of us, retirement is going to be what’s left of Social Security, our paltry retirement plans, and anything we get from our parents. It’s going to be hard enough making ends meet in retirement, let alone losing the help many of us were going to get from our parents.
Say it ain’t so, Joe.
Other Interesting Stuff
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Biden makes LGBT history with the first openly-trans federal official confirmed by the Senate:
The weather is gorgeous in DC, and my girl Sasha is ready for it:
Have an amazing weekend, folks.
JOHN
John, your charts kind of show it, but wealthier Americans in general pass on more wealth to the next generation. The fact that an appreciated house may in fact be the only real way for lower and middle income families to pass something along to the next generation, is the real shame in this proposed policy. I wouldn't be as opposed to some form of this with some form of means testing and--if it's a matter of generating more income taxes--by leveling the playing field by making sure the wealthiest estates pay higher taxes.
Frankly, I do not understand why the President isn't looking to completely roll back the 2017 TCJA that f*cked most of us who aren't in the Top 10 percent. I know there's a "sunset" on most of the Trump tax plan 2026, but we can't wait that long and the Republicans are going to play the "Democrats are trying to raise YOUR taxes" to the red hat idiots (whose taxes actually all increased in 2018) as we approach 2026 anyway, so why not get ahead of them?