President Joe Biden wants the Internal Revenue Service to receive an additional $80 billion in funding over the next ten years. The funds would be earmarked for enforcement: following the old saw, they’re spending money to make money.
My source is the Wall Street Journal. Specifically, its Risk & Compliance Journal, which comes to my inbox every day. In absence of a tumbler of absinthe, I relish it daily with iced java. Work in this industry long enough and the ordinarily tedious becomes compelling.
R&CJ says the new spending would allow those grabbers at the IRS to double their enforcement team and “give it new tools to combat tax dodging by the wealthiest Americans.” Oh, it’s them – in trouble again.
If you’re wealthy out there, this may shiver your timbers. You’re not alone, as wealth planners are pulling hair and getting carpal-tunnel symptoms from answering calls from a cascade of jittery clients. A lifetime of estate planning may soon go all Robert Burns-style on our chairbound backsides.
“The best laid schemes o’ Mice an’ Men, Gang aft a-gley,” posey-ed the pence-pinching Scotsman, the ploughman’s poet who likely knew a bit about low-liquidity agricultural assets. We will return to this subject, which is germane to our theme.
Expressed in contemporary slang from another green and pleasant shore, if President Biden’s proposal to end the step-up in basis becomes law, one of the cornerstones of the modern estate planning universe will soon go ‘arse over teacups’.
The president presented his ideas and a few other concepts equally bone-chilling to estate planners and the wealthy – O, what a panic’s in thy breastie! – during a recent address to Congress. That’s as close as we get to carving it in stone in America, so there’s no doubt he means business.
Here’s the straight dope: first off, the capital gains tax rate would be raised from the currently moderate 23.8% to 43.4%, in line with – nay, exceeding – the top income tax rate. The original idea, impressed into law one hundred years ago, was to tax capital gains more gently than income to encourage investment and discourage holding assets too long, which is bad for the markets. The step-up in basis, which revalues assets to their current value when the original owner dies and passes them to heirs, will be cancelled, should the president prevail.
When you die (it happens), under the regime proposed by President Biden, any capital gains on the original purchase price would be immediately taxable at the new rate. If you’d bought a few shares of Apple Inc. back in the 1980s, as I contemplated in the innocence and enthusiasm of youth, but failed to do in insouciance and a cloud of disreputable smoke, you’d be rich now. You can’t take it with you, alas, so under Joe’s new regime, your heirs would inherit one helluva storm of a tax bill.
A spot of good news: his plan allows a $1 million exemption on capital gains. The White House is hoping this will keep most, if sadly not all, of us happy; a curious lack of inclusiveness, if you ask me, sunk in my funk of skepticism.
The exemption is important as it would in fact cover the capital gains of the average American. This is one of those issues most people believe doesn’t apply to them, but two-thirds of us, according to my coffee companions at the Wall Street Journal, will eventually generate unrealized capital gains.
A crabby aside: Joe Biden, long described as the ‘poorest man in Congress’, is now worth more than $9 million. He and his wife made eight figures in speaking fees over the last few years, and the pair has invested wisely, I’m told. I wonder at the capital gains bill he’ll leave for his spotlighted son. Perhaps this sounds petty, yet it’s the way we all talk in Massachusetts, over chowder and iced whiskey. How do these politicians get so rich?
If you want odds, I expect the step-down to do just that, but the president’s plan must swan through Congress first. Optimists – those folks who live outside of New England – think the final bill will be toned down. Democrats from farm states are anxious for their landed constituents: paper-rich ploughmen, bare hands in barren pockets. Americans like their farmers, don’t want to see them pushed too hard. They draw a lot of water in Congress, too.
Rep. Cindy Axne of Iowa, a Democrat, is pushing for a family farm exemption. So the horse trading begins on the Hill – a healthy process in a normal democratic environment, as older readers may recall.
Democratic supporters think the opponents are making a mountain out of a mouse hole; very few citizens will ever feel the pinch, they say. True enough. Yet those opponents point to the anticipated reduction in the estate tax exemption, from today’s $11.7 million to five or three-point-five million, depending which Democrat is speaking. Killing the step-up would amount to double-death taxation on estates, critics say. Recall that some states have death levies, too, and more are considering them. It piles up.
Estate planning firms reported a whirlwind of calls from clients post the president’s speech. Family fortunes, shielded by the step-up since 1921, look vulnerable. Right now, some of the worried wealthy are sharing the riches early with family and charities, dodging an arrow yet to be loosed. If the old planning regime falls, expect new strategies to protect family fortunes – eventually. In the interim, things could get costly.
For the wealthy out there, oft have I thought: how blessed you are, compared to my sorry state. Yet when I see these dreary prospects, and wonder at how you must startle: old houses facing ruin, weary winter comin’ fast! Noxious prospects level us down – earth-born companions and mortals, both – anxious hearts beating in timorous breasts.
No, this paraphrased finale won’t do; please read the Burns poem yourself. Calliope, the poet’s goddess, maintains her estate yet. That, at least, no one can take from us.