Unpacking Tax Implications for Capital Gains, Retirement Plan Contributions & Estate Taxes


News Finance

In the last of our three-part series investigating the many facets of the tax legislation proposals currently under consideration by Congress, the MICPA examines the potential impacts of President Biden’s tax proposal on capital gains, retirement plan contributions and estate taxes. In a recent presentation to the Michigan Chamber of Commerce, MICPA board member Leon LaBrecque, JD, CPA, CFP, CFA at Sequoia Financial Group highlighted the proposed increase of the minimum tax on foreign income as the primary capital gains tax on higher income brackets.

According to CNBC, part of that includes raising the top individual income tax rate to 39.6% from the current maximum of 20% for taxpayers earning more than $1 million in annual income. Adding in the Net Investment Income Tax (NIIT) of 3.8% and you get a capital gains rate of 43.4%.  In order for this move to actually be profitable in terms of U.S. tax revenue, however, the step-up basis – which allows heirs to receive assets valued as of the date of death – would also need to be eliminated. Otherwise, instead of raising $113 billion, this facet of the tax plan would ultimately cost $33 billion as higher income earners could choose to hold their investments longer until they could bequeath them to their heirs, tax-free. Overall, this change would impact roughly 0.3% of taxpayers, according to the most recent data from the IRS1.

In his presentation, LaBrecque observes that capital gains taxes have a history of negatively impacting stocks. For that reason, he posits that the current capital gains tax proposal is unlikely to pass despite its potential to drastically increase tax revenue.

More likely to pass, however, are the proposed changes to retirement plan contributions, which, according to LaBrecque, will “equalize” the benefit of pre-tax retirement plan contributions via an estimated 26% tax credit. According to U.S. News & World Report, “If the Biden 401(k) plan were to become law, the tax deduction for contributing to a 401(k) would be replaced with a tax credit. This 401(k) change would likely result in high earners getting less of a tax break on their 401(k) savings and low and middle earners getting a bigger tax benefit2.”

Finally, the proposed changes to the estate tax also stand a greater chance of passing than a capital gains tax, according to LaBrecque’s analysis. The current proposal calls for a reduction in the annual exclusion to $3.5 – 5 million from $11.7 million. Forbes reports that at the current $11.7 million threshold, few taxpayers ever incur the estate tax. Lowering the threshold will mostly impact wealthier families as less generational wealth will transfer to heirs over time3.

According to Bloomberg Tax, “The effect of this reform would bring in much needed revenue to support the massive expenses of the pandemic as well as President Biden’s interest in building out the infrastructure. There is “chatter” about doing away with the “step up” of cost basis upon death for capital assets and replacing it with “carry-over basis” (the beneficiary, at death, inherits the decedent’s original cost basis), but this change has never been successful, and it could be inherently problematic4.”

For now, LaBrecque suggests reviewing clients’ estate plans while watching effective dates to be prepared. MICPA members can also prepare for any potential changes to capital gains taxes, retirement plan contributions and estate taxes by logging into MICPA Connect to share strategies and voice concerns with other professionals working in the tax policy space.

Postscript:  On May 27, 2021, the Biden Administration suggested the capital gains rate change would be retroactive to late April of 2021, according to The Wall Street Journal5.

  1. Iacurci, Greg. “Biden Capital Gains Tax Plan Would…CNBC. 27 Apr. 2021. Accessed on 27 May 2021.
  2. Brooks, Rodney. “President Biden’s Proposed Changes to 401(k) Plans.U.S. News & World Report. 22 Jan. 2021. Accessed on 27 May 2021.
  3. Farrell, Chris. “How Estate Tax Changes Could Affect You and Your Family.Forbes. 9 Apr. 2021. Accessed on 27 May 2021.
  4. Montag, Henry & Andrea B. Schanker. “Estate Planning Opportunities Under…Bloomberg Tax. 24 Mar. 2021. Accessed on 27 May 2021.
  5. Rubin, Richard. “Biden Budget Said to Assume Capital-Gains Tax Rate…The Wall Street Journal. 27 May 2021. Accessed 1 June 2021.

Source: MICPA

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