By Tom Lubnau and Alison Gee, guest columnists
Most folks understand death taxes. When someone dies, the Federal Government takes a percentage of that person’s wealth in tax. The tax doesn’t apply to most people, because the federal government starts taxing wealth from someone’s estate for every dollar over $11.7 million dollars.
Now, the Biden Administration, and their friends in Congress, have concocted a plan, using the complexities of the tax code to seize your family’s wealth in just a couple of generations. Since the plan relies on complicated words and accounting concepts, overworked and underpaid reporters can’t explain the tax in a 30 second blurb on TV or social media. But, it is important we all understand these concepts, or our life savings will never be passed to our children.
For you to understand how the tax works, we have to take some time to understand some important accounting terms, and then we can understand how this nefarious tax works.
When you buy a piece of property, the amount you paid for the property is called its “basis.” If you bought property for $100,000, the amount you paid for the property is called its basis. In this example, the basis in the property is $100,000.
If you sold the property for $500,000, the difference between the basis ($100,000) and the sale price ($500,000) is called a gain ($500,000 – $100,000 = $400,000 gain). If you held the property for more than a year between when you bought it and when you sold it, the gain is called capital gain. While you are alive, if you sell your property, you get taxed on that gain. That tax is called the capital gains tax.
When you die, the current tax code does not tax the property moving from you to your children until the net value exceeds the exemption – currently $11.7M. This means your kids get to inherit your property, which you, by the way, already paid taxes on to acquire, with a basis “stepped up” to the value of the property on the date of death. This step up in basis would allow your kids to sell the property the day after you died without paying any tax on the sale. So, in our property example, if the value of the property on the date of death is $500,000, the basis of the property would be automatically “stepped up” to the fair market value. So, there would be no difference between the value of the property ($500,000) and the basis (stepped up from $100,000 to $500,000) and there would be no tax due ($500,000 – $500,000 = $0). Since there is no gain, not taxes are due.
The Biden Administration wants to take away the stepped-up basis, and make your children pay taxes on your property that you already paid tax to acquire. Senators Chris Van Hollen, the prime sponsor of the bill to take away your wealth called the Sensible Taxation and Equity Promotion (STEP) Act, says that the “stepped-up basis” is a loophole, and that taxes in 2021, alone, will be increased by $41.9 billion dollars if this passes.
There are a lot of exceptions and loopholes in the proposed tax, including a deduction for the first $1 million dollars of gain, and $500,000 for a residence. Everything over that is taxed.
But, as a kind gesture, the Federal Government will allow you to buy your property back from them with payments for fifteen years taxed at the current prevailing IRS rate. During the time the payments are made, the Federal Government puts a mortgage debt notice on your property called a lien.
So, if your parents have worked their whole life and acquired property in excess of $1 million dollars, the Federal Government will tax the appreciation of the property. Even if the property is not making any money, the value of the property will be taxed. And if you cannot pay the tax, the Federal Government will foreclose on the property and take it away from you.
Who is at risk? Every family farm, ranch, small business or big business is at risk. Stocks in companies, ownership interests and even interest in guns or precious metals are subject to this nefarious tax. The people who earned the money and acquired the wealth will not have to pay the tax. They already paid the taxes on the money used to acquire the property. Their kids and grandkids will have to pay the tax.
But, people will not be able to pass wealth to their children without cutting the federal government in on up to 50% of the pie.
This is all further complicated by the fact that a whole generation of people may not have been keeping all of the records that would be required to show what money has been contributed to improve their non-business property over their entire lifetime – as you pay money to improve property, your basis increases by the amount you contribute for the improvements. You will be taxed for not having records that you used to not have to keep prior to this tax law change.
The goal of the tax appears to be the end of family wealth. The American dream of leaving your children better off than you were is going to be taxed out of existence by the Biden Administration and this horrible tax.
Oh, and as an added insult, the tax bill as drafted makes the tax retroactive to January 1, 2021, so there is nothing you can do now to plan for the tax.