Perhaps no other federal tax has earned more of a bad reputation among Americans than the estate tax. Among all of the taxes that seem to be continuously in danger of going up and are always at risk of producing revenue that the government fails to administer wisely, the estate tax is so unpopular that the derisive nickname “death tax” has stuck with it over the decades.
The death tax consistently polls as the least fair tax, as it taxes assets that have been taxed previously, perhaps multiple times, and often cause families to sell businesses or farms they otherwise would keep to pay the tax.
Over the years, the unfairness and unpopularity of the death tax have forced reductions on the federal level and outright elimination in many states. The national death tax rate has been decreased from 55% to 40%, with the exemption for married couples extended to $25 million.
Despite the problems with the death tax of years past, the Biden administration is now proposing an all-new death tax to run parallel with the old one.
The new death tax would be assessed against a decedent on the person’s final ordinary 1040 income tax return. Unlike the old death tax, this one will apply to tens of millions of ordinary Americans.
The new tax would apply to unrealized ordinary capital gains on assets sold during the year a person dies. The first $1 million of unrealized gains would be exempt for an individual, as would be the first $2 million for a married couple. Gains on the sale of primary residence up to $500,000 would also be exempt.
The vital part of the new tax to understand is that it will apply to unrealized gains and gains on assets that haven’t been sold. Ordinarily, no one pays tax on the increase in value of capital assets like land, businesses, or securities that are not sold and from which cash proceeds have been realized.
Further adding to the new tax burden, the Biden administration proposes an increase in the top rate for long-term capital gains to 43.4 percent, up from 23.8 percent. And, of course, there is the old death tax that also still applies.
The new death tax would lead to even more American families facing immense taxes forcing liquidation of assets that their parents spent a lifetime paying for with income that has already been taxed.