Provision dubbed ‘middle-class death tax’ could break one of Biden’s signature promises

President Biden emphatically stated he would not raise taxes on Americans making less than $400,000 per year, but that promise could be shattered by his closing of an inheritance loophole that may create a “death tax.” Ironically, the Biden family fortune would remain untouched.

The offending piece of legislation is buried in the American Families Plan and would radically revise the way capital gains taxes are paid on estates after someone passes away. The provision is being dubbed a “middle-class death tax.” If a family member dies and leaves a home or other assets to their loved ones, it could result in their beneficiaries having to sell the items to meet the imposed taxes that Biden is proposing.

“The American Families Plan as proposed would impose a new death tax that would punish middle-class individuals who chose to invest in America and leave something for their children rather than spend every dollar,” remarked Hank Adler, who is an associate professor at Chapman University and the co-author of a new study. “The plan does not move the goalposts, it totally changes the rules of the game.”

Currently, capital gains taxes are generally levied on profits when assets are sold, not when they are inherited. For estates that are valued at more than $11.7 million, a tax is imposed on “unrealized gains” which pertains to the increase in value of the home, shares, and other assets even if they are not sold. This means that homes or estates worth less than this amount can be passed on to loved ones and they are only taxed on the gains when they sell the asset(s).

Biden is calling this stipulation the “trust fund loophole” and has vowed to “eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs.” A White House “fact sheet” contends that “our tax laws allow these accumulated gains to be passed down across generations untaxed, exacerbating inequality.”

The president’s proposed change to tax law would reduce the threshold to $1 million. But there are likely to be unintended significant consequences to the move as pointed out by Adler and California attorney Madison Spach who published an article in the Wall Street Journal on how the levy could hit some modest estates exceptionally hard.

Biden’s plan would raise the total top rate on capital gains, which is currently 23.8% for most assets, to 40.8%. The plan would apply the same tax to unrealized capital gains following death and exempt only the first $1 million (or $2 million for a married couple) plus $250,000 for a personal residence.

Adler and Spach posit the plight of a widow who bought a home in New York City decades ago when it was worth $250,000. Now, the home is worth a whopping $2.5 million and it is the only asset the woman has to leave to her family. If she passes away under Biden’s proposed plan, the estate would not be taxable but it would be subject to a death tax on $1 million of unrealized gains (the $2.25 million appreciation less the $1.25 million in exemptions). That means that $408,000 would be mandated for taxes immediately possibly forcing the sale of the family home.

The circumstances for the Biden family would be radically different concerning inheritance.

“Joe and Jill Biden have an estimated net worth of $8 million, according to Forbes,” reported Adler and Spach. “Mr. Biden’s disclosures indicate that their assets consist of two personal residences along with several annuities and life insurance policies.”

They have two homes that would be subject to capital gains when they pass. The appreciation of those assets will almost certainly be less than the $2.5 million exemption for a married couple. As wealthy as the Biden’s are, they would be far less penalized (if at all) than the widow in New York City.

The authors noted: “Scenarios in which the new death tax would significantly reduce, nearly eliminate or even totally eliminate the net worth of decedents who invested and held real estate for decades wouldn’t be uncommon.”

Democrats are pushing hard for tax reform and massive increases in tax revenue. They feel they can fund progressive projects such as Biden’s infrastructure plan with more taxation. Amid those plans, they insist they want the wealthy to pay their fair share. However, their proposals allegedly do exactly the opposite… penalizing middle-class Americans while allowing the wealthy to hold on to their assets, investments, and money.

All of this comes after Biden promised Americans who were earning less than $400,000 that they would not see a tax hike to fund infrastructure projects worth over $4 trillion.

Biden stated in Virginia in May during a “read my lips moment”: “The reason I’m bothering to do this (raise taxes) is I keep hearing out in the press ‘Biden is going to raise your taxes’ Anybody making less than $400,000 a year will not pay a single penny in taxes.”

As much as the left calls for increased taxation on the wealthy, they always find a way to avoid those penalties. Middle America has no such recourse.

Rep. Kevin Brady (R-TX) remarked that the tax increase would be “another major economic blunder by President Biden.”

He added: “Look… after the Tax Cuts and Jobs Act, investment surged in America, and as a result, it was blue-collar workers, it was local communities that benefited. When you double that tax, you have the opposite effect. In reality, you wouldn’t encourage a cure by punishing the most frequent and successful researchers. You don’t rebuild a healthy economy by punishing those who invest in that local and U.S. economy, and that’s exactly what you have here. So at the end of the day, American workers are the net loser in President Biden’s capital gains proposal.”

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