Proposed changes to capital gains and inheritance taxes create headaches
Deaths and taxes
By Jim Moran, CPA
On April 28, the Biden administration released its revenue proposals for fiscal 2022. Along with increasing the corporate tax rate to 28% and the top personal rate to 39.6%, widespread changes were proposed at capital gains tax rate and inheritance tax.
Under current federal law, upon death, property is transferred to a beneficiary at fair market value, with a few exceptions. This means that the beneficiary base usually becomes the value of the property on the date of the deceased’s death, also known as the “gross-up base”. For donations made during the lifetime of a donor, the donee receives the donor’s base in the asset. This means that the donee’s base remains the same as the donor base, usually the original cost plus any upgrades. No taxable gain or loss occurs on the transfer of ownership. The gain or loss is only realized when the property is finally sold.
According to the Biden administration’s proposal, transfers of property appreciated on death or by donation may result in the realization of a capital gain for the donor or the deceased at the time of the transfer. This means that tax can be triggered on the date of transfer, whether the property is subsequently sold or not. This would be accomplished by eliminating the basic mark-up on the death of a deceased person and requiring that a tax be paid on a portion of the value of a donation made.
Fortunately, the Biden proposal would allow an exclusion of $ 1 million per person from the recognition of unrealized capital gains on property transferred by donation or held at death. The exclusion per person would be indexed to inflation after 2022 and would be transferable to the surviving spouse of the deceased according to the same rules as those that apply to portability for the purposes of inheritance and gift tax (this which makes the exclusion of $ 2 million per married couple). It is important to note, however, in the case of gifts, the donee’s basis in property received by donation during the donor’s lifetime would be the donor’s basis in that property at the time of the donation to the extent that the unrealized gain on this well counted against the $ 1 million exclusion of the donor from the recognition.
“According to the Biden administration’s proposal, transfers of property appreciated on death or by donation may result in the realization of a capital gain for the donor or the deceased at the time of the transfer. This means that tax can be triggered on the date of transfer, whether the property is subsequently sold or not.
Tangible personal property (other than collectibles) would also be excluded from the triggering of the gain. The exclusion under current law for certain small business actions would remain, and the exclusion of $ 250,000 per person under current law for capital gain on a principal residence would apply to all residences currently. authorized under section 121 of IRC and would be transferable to the survivor of the deceased. spouse, making the exclusion of $ 500,000 per couple.
The Biden proposal allows certain exempt assignees. Property transferred by a deceased person to a charity would be exempt. Transfers from a deceased to a US spouse would be the deceased’s deferral basis, and the capital gain would not be recognized by the surviving spouse until the surviving spouse disposes of the assets or dies.
In addition to transfers following death or donation to an individual, transfers of property appreciated in or distributed in kind from trusts (other than revocable transferor trusts) and partnerships may be treated as recognition events for the donor or the donor’s estate. Another important concern when it comes to partial interest is valuation. The transfer of a partial interest would be done at the “proportional part”. Valuation discounts for minority interests will not apply.
Under Biden’s proposal, the donor would report any deemed recognition event on the donor’s tax return. A deceased person would report any capital gains on an estate tax return or, potentially, on a separate capital gains return. A deceased person would be able to offset capital gains with any unused capital loss carryforward and up to $ 3,000 of ordinary income on their last individual tax return. Any capital gains tax deemed realized on death would be deductible on the deceased’s federal estate tax return if necessary.
The proposal would apply to gains on property transferred by donation and on property owned on death by people who died after December 31, 2021.
With a partisan 50/50 split in the US Senate, it’s currently unclear what the final proposal will be. Now is the time to start thinking about how the proposed changes will affect you. Make an appointment with your tax or financial planning professional to discuss the steps you should consider taking. You may need to be prepared to act quickly if these proposals come true.
Jim Moran, CPA, MST is a Manager at Melanson CPAs, focusing on Business Services and Tax Planning, Compliance and Preparation.