Recently the Biden administration has proposed numerous tax increases to pay for its infrastructure plan. Two of these changes, an increase in the Federal Capital Gains Tax, and changes to the Estate Tax can have significant tax implications to entrepreneurs.
We will address both proposed changes below.
Capital Gains Taxes
For capital gains taxes to apply, an asset needs to be owned by the taxpayer for a year or longer. The gain is calculated by taking the sales price, less appropriate expenses of sale, and subtracting the taxpayer’s basis. (Note: This calculation can be more difficult than it seems, and you should seek the advice of an experienced tax professional to assist you.)
The net gain is currently taxed at the following rates based on your taxable income.
|$ 0 – 78,750||0%|
|78,751 – 434,550||15%|
There may also be a 3.8% Federal Surcharge and state taxes to address. Although these taxes can be significant, the new Biden proposal calls for an increase in capital gains taxes for individuals with taxable income of greater than $1,000,000 to be taxed as ordinary income up to 37% under current tax rates but rising to 39.5% under the Biden proposal. State income taxes could also apply. Needless to say, the tax increases may be considerable.
In addition to the income and capital gains taxes arising from the sale of a business, many entrepreneurs have saved and invested so the Estate Tax may also come into play. The Estate Tax laws, and tax rates have changed at various times over the years and administrations. Currently, an individual receives an exemption of $11,700,000 before any estate tax, 40%, comes into play. That amount doubles to $23,400,000 for a married couple, so with proper planning, the estate tax does not impact the majority of families.
Additionally, there is a proposition to reduce the exemption to $3,500,000 per individual with a tax of about 55%. Perhaps, even more significant there are additional discussions about eliminating the “stepped-up basis” that applies to assets in an estate. As an example, if an individual bought a parcel of property for $100,000 and that parcel appreciates to $500,000 at the time of the individual’s death, the heirs could sell the property for $500,000 and pay no tax because the basis had “stepped-up” to $500,000. Under discussion now is that the property would not get a stepped-up basis and when the heirs sold the property for $500,000, they would pay taxes on the $400,000 gain.
As these changes have not yet been implemented, there may still be time to consult your tax advisors to implement appropriate changes.
The majority of our business comes from referrals, and we look forward to working with you.
Ronald V. Chernak
Inspiring business relationships since 1982!