The American Families Plan proposes raising the capital gains tax rate from 20% to 39.6% for those making $1 million or more, and includes eliminating the “step up in basis.”
A “step up in basis” allows heirs to use the fair market value of an asset at the time of inheritance rather than the original purchase price as the basis for capital gains when the asset is sold.
In other words, if the asset has a lot of built-in gain, a step up in basis allows for that gain to be eliminated at the time of the owner’s death. This proposal includes a $1 million dollar exemption (“$2.5 million per couple when combined with existing real estate exemptions”), an exemption for donations to charity, and “protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.” The details of these protections are not yet clear.
The Plan also includes the following potential provisions:
- The Plan proposes a limit to IRC Section 1031 like-kind exchange deferral to a maximum of $500,000 of gain.
- Raising the top individual income tax rate from 37% to 39.6% – This was the previous level prior to the 2017 Tax Cuts and Jobs Act (“TCJA”)
- Closing the “carried interest loophole” so that “hedge fund partners will pay ordinary income rates on their income”
- Eliminating rules that allow taxpayers making over $400K to avoid the 3.8% Medicare tax on earnings and net investment income
- Permanently extending the 2017 TCJA provision, section 461(l) that restricts the deductibility of active pass-through business losses to $250K/$500K
- Providing additional IRS funding to focus enforcement activities on large corporations, businesses, estates, and higher-income individuals
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