June 18, 2021
Any advisor has likely read about Biden’s new tax proposals on the “wealthy”. We use quotes on that term because many of them would also apply to middle class families. One such policy which would hurt most heirs is Biden’s plan for taxing family businesses. As most know, Biden is planning to tax inherited assets on their original basis (not the basis at death). This will cause a large spike in taxes for many, especially in the case of inheriting businesses, as the basis of most businesses is zero dollars, since many are founded by parents and left to children. Consider an example of a business which Ernst & Young presented in a report:
“…someone started a wine distribution company two decades ago. The business initially had no market value. When that founder dies in 2025, his daughter inherits the company, now worth $550,000 with annual revenues of $40,000.
Under current law, the company’s value for tax purposes would be “stepped up” to that new amount, and the daughter wouldn’t owe capital gains taxes on her inheritance. Next, say she sells the distributor five years later for $710,000, when its annual income has grown to $50,000 and she’s ready to cash out. Under current law, she would owe the 23.8% capital gains tax on its appreciation under her wing, or more than $38,000 ($710,000-$550,000 = $160,000; $160,000 x .238 = $38,080).
Under Biden’s proposal, she wouldn’t owe tax upon inheriting and running the business her father started — but neither would it get a stepped-up basis. Which means that when she eventually sells the company for $710,000, she would owe capital gains tax, at Biden’s higher rate, on its total gains since it started from zero. That’s a tax bill of more than $281,000 ($710,000 x .396 = $281,160). Under the White House’s plan, her tax bill is more than seven times higher. She can pay it over 15 years, at more than $18,700 a year, but may not have the cash from its sales.”
(Washington)
FINSUM + Magnifi: This is obviously a massive hike and a terrible burden for all but the wealthiest individuals. It is likely to cause debt for many, and a resulting fire sale in small businesses.
Other news today: Credit Suisse Says to Keep Running with the Bulls and Biden’s Infrastructure Bill Has Big Implications
{{cta(‘031ca73e-408c-41ef-9886-bfe7cd5553d7′,’justifycenter’)}}
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. As of June 2021, 380,000+ users with $534+ Billion in Assets Under Influence, have used Magnifi over 3,800,000 times. Try it for yourself today.
This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide brokerage or custody services.]