President Barack Obama is proposing a fundamental change in tax policy that would limit what many Americans can leave to their heirs. It will affect people who aren’t wealthy enough to pay estate taxes, if their assets have gained sharply enough in value as well as very wealthy people who can afford to pay.
A family home or a stock portfolio that grows in value to $1 million over the years and goes to a child could be subject to taxes on that gain, whether or not it’s sold.
Though it’s likely to go nowhere in the Republican-led Congress, the plan lays down a marker for future Democratic tax policy. That prospect is prompting people to seek advice from estate planners and lawyers as they consider the proposed new tax at death that could expose a family home, business or securities to more than 60 percent in combined federal and state levies.
Obama’s proposal, which will be detailed in his budget plan on Feb. 2, would impose a capital gains tax at death on the growth in the value of assets since they were purchased, except for those donated to charity. The plan also raises the top capital gains rate to 28 percent from 23.8 percent.
The “Exemption” for new proposed rules are relatively small,
There would be a $200,000 exemption plus a $500,000 exemption for homes. For the $1 million home initially purchased by a married couple for $250,000, that would mean $500,000 of the gain would be exempt and a federal tax of up to $70,000 would be owed on the remaining $250,000 in appreciation.
It’s one of the plans Obama is pushing in his final two years in office that resonate with those concerned about income inequality and policies that promote inherited wealth.
Gift-giving is a particularly advantageous strategy for assets — like a growing business — that have a relatively low value now but are expected to increase.
Currently, upon one’s death, the estate is assessed the federal estate tax with a top rate of 40 percent on property. Yet it applies only to the handful of Americans with more than $5.43 million in assets and for married couples with more than $10.86 million.
If and when heirs sell, they owe capital gains taxes only on the difference between the sale price and the value when they inherited the asset.
In some cases, all appreciation during one’s lifetime can go untouched by the capital gains tax. That gives people an incentive to hold onto assets for tax reasons, especially if they have a low-cost basis, or the value when purchased.
The Treasury Department says an even greater share of the costs are borne by the wealthiest households, with more than 80 percent of the burden on the top 0.1 percent.
Because state income taxes — including California’s 13.3 percent top rate — typically apply to capital gains, the combined rates for some taxpayers may exceed 60 percent.
This makes the use of CRT`s, Nimcruts and other charitable planning very hot planning topics again after the rise in the death Tax limits left some advisors thinking that the “Estate Planning Industry” was wounded beyond repair…clearly its not!
The sale of Life Insurance inside “ILIT`s” will grow largely again to replace the assets used in Tax plays, if this passes as submitted.
The Tax What if Doctor;-)