Recent U.S. Federal Income and Estate and Gift Tax Proposals

Recently, three separate tax proposals have been released (one from President Biden, one from Senator Bernie Sanders, and one from Senator Chris Van Hollen) which, if enacted, would significantly increase the U.S. federal tax liability of wealthy individuals and corporations.  None of the proposals have advanced beyond being introduced to Congress (and the Biden proposal has not even reached that stage yet).  Thus, it is too early to assess the likelihood that the proposals will be enacted or to estimate a timeframe by which they will be acted upon by Congress.

 

The key elements of each of the proposals are briefly described below.  However, before summarizing the contents of the proposals, it should be noted that many of the laws pertaining to nonresidents with U.S. investments have remained unchanged.  Specifically, none of the proposals would change the rules governing:  (i) asset situs for estate/gift tax purposes (thus foreign blockers would remain viable planning options for holding U.S. assets); (ii) income or estate/gift tax residency; (iii) the portfolio interest exemption; (iv) when income will be considered derived from U.S. sources and, thus, subject to U.S. income tax; or (v) the classification of entities (i.e., the “check-the-box” rules).

 

President Biden’s American Jobs Plan

 

On March 31, President Biden unveiled a $2.25 trillion infrastructure package called the “American Jobs Plan”.  To fund the costs of this package President Biden proposed a number of tax increases[1] including:

 

 

Senator Sanders’ “For the 99.5% Act”

On March 25, Senator Sanders introduced the “For the 99.5% Act” (the “Sanders Bill”) that would significantly increase the estate tax liability of the wealthiest U.S. taxpayers.  According to a summary released by the Senator’s office,[2] the Sanders Bill would:

In addition, the Sanders Bill would (i) lower the gift tax exclusion amount to $1 million[4] and (ii) deny the tax basis step-up with respect to assets held in grantor trusts which are not included in the grantor’s gross estate for estate tax purposes.

Senator Van Hollen’s “Sensible Taxation and Equity Promotion Act of 2021”

On March 29, Senator Van Hollen released the Sensible Taxation and Equity Promotion Act of 2021 (the “STEP Act”).  The intent behind the STEP Act is to effectively nullify the current tax rules which permit heirs to take a fair market value tax basis in inherited assets (commonly referred to as a tax basis step-up).   Under these rules, otherwise taxable appreciation in a decedent’s assets is purged at death without anyone being required to pay income tax on such appreciation because the gift or bequest of property is not considered a “realization” event which would require the transferor to recognize taxable gain.

As drafted, the STEP Act would eliminate the benefits of the tax basis step-up rules by treating a gift or bequest of property as a realization event and requiring the donor or decedent to recognize gain as though the property were sold at fair market value.  The STEP Act permits an exemption of the first $100,000 (as adjusted for inflation) of gains recognized from gifts and the first $1,000,000 (as adjusted for inflation) of gains recognized on bequests.

Thus, if the STEP Act were enacted, a transfer of appreciated property would attract both income tax and gift/estate tax.

[1] During the presidential campaign, President Biden proposed a number of other tax increases including (i) returning the top individual tax rate to 39.6%, (ii) taxing capital gains and qualified dividends above $1 million at ordinary rates (i.e., at 39.6%), (iii) eliminating the tax basis step-up at death, and (iv) reducing the estate and gift tax exemption amounts to approximately $3.5 million ($7 million for married couples).  To date, no further action has been taken by the Biden administration with respect to any of these proposals.

[2] https://www.sanders.senate.gov/wp-content/uploads/For-the-99.5-Summary.pdf.

[3] Please note that the unified estate and gift exemption amount is currently scheduled to decrease by half (to approximately $5.85 million/person or $11.7 million/married couple) for tax years beginning after December 31, 2025.

[4] If adopted, the Sanders Bill would effectively dispose of the unified estate and gift tax exemption amount and replace it with separate exemption amounts for estate tax (i.e., $3.5 million) and gift tax (i.e., $1 million).

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