December 9, 2023

Hollie Adams / Bloomberg via Getty Images

President Joe Biden has made repeated promises not to impose taxes on households that earn less than $ 400,000 a year.

Whether his tax proposal keeps or breaks this promise depends on the frame of reference.

First and foremost, according to tax experts, it is a question of how an observer views a taxpayer who earns less than $ 400,000 and has a one-time income.

It can do this by selling a home, business, stock, or other asset – whether in life or in the event of death – that has increased significantly in value.

Let’s consider a hypothetical family that has consistently made $ 200,000 a year over two decades:

If all else were the same, taxes would likely not go up for this household during this period if Biden’s plan were implemented, experts said. But what if the same family sold a valued business for $ 2 million the following year? That would likely trigger a higher tax rate on capital gains this year, according to Biden’s proposal.

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This scenario begs a fundamental question: should the public place such a taxpayer in the category of those earning less or more than $ 400,000?

Based on a rigorous interpretation of Biden’s promise, tax experts say higher taxes for this hypothetical family (in the year of the business sale) would not break the president’s promise. The family’s total income for the year would be $ 2.2 million – much more than the $ 400,000 mark.

This is the lens through which the White House looks at Biden’s tax plan.

“Consistent with the presidential nomination, individuals and families earning less than $ 400,000 will not see their taxes increased,” a White House official said.

However, some observers may view higher taxes on this hypothetical family as breaking the “spirit” of the promise, said Jeffrey Levine, chief planning officer at Buckingham Wealth Partners in Garden City, New York.

Such taxpayers consistently made less than $ 400,000 and spent years building business capital, said Levine, an accountant and certified financial planner. The sales proceeds could also be the largest source of family retirement savings, he said.

Of course, Levine said, this scenario would not be a technical breach of Biden’s campaign promises and would only apply to a tiny fraction of taxpayers.

“So many of the changes [the administration is] “They’re all geared towards those who make more than $ 400,000,” he said. “You have done a solid job delivering on that election promise.”

Biden tax plan

Biden’s tax proposal would likely hit the aforementioned taxpayers about a higher capital gains tax paid on the appraised value of an asset.

The Biden government plans to raise taxes for the wealthy to fund local initiatives like additional years of free education and expanded tax credits in the American Families Plan. The benefits would mainly go to low- and middle-income households.

The president would raise the cap on capital gains to 39.6% from the current 20% for assets sold after more than a year in ownership. (That would be the same top tax rate as on regular income.)

It would only apply to taxpayers whose gross adjusted income exceeds $ 1 million – the highest 0.3% of taxpayers.

We are talking about relatively few people. But it’s not zero.

Howard Gleckman

Senior Fellow at the Urban-Brookings Tax Policy Center

And only that portion of income or profits over $ 1 million would be taxed at the highest rate of 39.6%, according to a White House official.

The administration would also change the rules for treating assets in the event of a taxpayer’s death.

In particular, death would be treated as a “realization” event. Assets with an increase in value of more than $ 1 million would be treated as if they were being sold – and subject to capital gains tax. (This applies to married couples with a profit of $ 2 million or more.)

Currently, estimated assets are not subject to capital gains tax in the event of death. Heirs receive stocks, houses, and other assets at their current market value and only pay taxes on subsequent profits when they sell.

The first $ 1 million for single taxpayers ($ 2 million for married couples) would be exempt from Biden’s tax on unrealized capital gains. Single and married taxpayers could exclude an additional $ 250,000 and $ 500,000, respectively, for a primary residence.

According to Howard Gleckman, Senior Fellow at the Urban-Brookings Tax Policy Center, there are limited scenarios where taxing unrealized gains on death affects taxpayers who earned less than $ 400,000 in the year of their death.

This could be the case, for example, of a person who bought many shares in Microsoft in the 1980s and held them to the death, but lived on a modest social security and retirement income, according to Gleckman.

“This is the guy who falls between the cracks and ends up paying the taxes even though he made less than $ 400,000 in his last year,” he said.

These situations would apply to just 0.6% of taxpayers, who earn $ 200,000 to $ 500,000 in the year of their death, according to an analysis by the Tax Policy Center.

“We’re talking about relatively few people,” said Gleckman. “But it’s not zero.”

Of course, such taxpayers would have died; From a practical point of view, higher taxes may not play a major role in these cases. But they might leave a smaller estate for the heirs if assets had to be sold to pay the additional tax. (However, there are mechanisms such as insurance in place to prevent such an outcome.)

And the Biden government offers certain exemptions to mitigate the effects of a capital gains tax in the event of death. For example, certain family businesses and family businesses would not owe taxes until the business was no longer family owned.