To tax wealth, Biden would narrow ‘stepped-up basis’ loophole
President Biden proposed stricter application of capital gains taxes, potentially generating billions of dollars in federal revenue, on Wednesday by restricting use of the decades-old “stepped-up basis” that reduces liability on inherited property. Although the White House said it would not increase taxes on heirs who want to keep the family farm running, the largest U.S. farm group was skeptical that the protection could be fashioned into law.
“We are going to reward work, not just wealth,” said Biden during his first speech to Congress since taking office. The speech included a call for making high-speed internet service available to all Americans, “including 35% of rural Americans who still don’t have it,” and urged a pathway to citizenship for undocumented farmworkers “who put food on our tables. Immigrants have done so much for America during the pandemic, as they have throughout our history.”
During the campaign, Biden suggested eliminating the stepped-up basis as the way to pay for two years of free tuition at community colleges. In its American Families Plan, the administration said it would not allow stepped-up basis on capital gains that exceed $1 million — equal to $2.5 million per couple when combined with existing real estate exemptions, it said.
The $1.8 trillion administration proposal would increase the top tax rate, paid by the wealthiest Americans, to 39.6%. Families with income of more than $1 million a year — 0.3% of U.S. households — would pay the same 39.6% rate on capital gains, which now carries a top rate of 20%. A loophole for hedge fund partners also would be closed.
“Wall Street didn’t build this country. The middle-class built this country,” Biden said.
At present, farmland and other property is assessed at current value when it is inherited — the “step up” — rather than taxed on the increase in value since it was acquired. Stepped-up basis reduces the tax burden if the property is sold soon after it is inherited, and reduces the chance of estate tax liability.
The White House said its proposal “will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.” Nor would capital gains taxes be collected if property is given to charity, it said.
One-third of U.S. farms — the roughly 659,000 farms that operate 91% of farmland — have assets that could trigger the “new capital gains tax imposed at death,” said Pat Wolff, an American Farm Bureau Federation lobbyist. The White House painted its proposal in broad strokes. “We have no information about what that would be,” said Wolff, referring to the proposed shield for families who stay in farming. Previous proposals in this area quickly became so complex that they discouraged farmer participation, she said.
“We believe farmers and ranchers are middle-income families,” said Wolff, not the investor class that Biden targeted. “Running a farm is work,” often with long days and uncertain returns. Farmers own assets that can be worth a lot, she said, but “that doesn’t make them wealthy.”
The AFBF wants to keep stepped-up basis as it is. Any reduction in the tax break, it said, “could result in a massive tax burden on the agricultural sector.”
However, the USDA said few farm families would be affected. “Estimates indicate more than 98 percent of farm estates will not owe any tax at transfer, provided the farm stays in the family. The tax the remaining less than 2% would owe would be on their non-farm assets,” said the USDA.
Biden’s package omitted campaign proposals to increase the estate tax rate to 45% from the current 40% and to lower the estate tax exclusion to $3.5 million from the current $11 million, reported Axios.
The exclusion was raised to $11 million per person as part of the 2017 tax cut law. It will revert to $5 million per person in 2026 when that part of the tax cut expires, but it will be indexed for inflation.
Only a comparative handful of farm households are obliged to file a federal estate-tax return and most of them do not pay the government any money, according to USDA economists. “Research suggests much of the appreciation in the value of assets in the estate has never been taxed — either as income or capital gains — and thus will escape taxation completely,” they said in a recent report.
The text of Biden’s speech is available here.