Senate Democrats are circulating a plan that would trigger tax bills on the assets of the wealthy after they die as the lawmakers seek new sources of revenue to fund trillions of dollars in infrastructure spending and social programs.
The draft legislation would seek to end a long-standing feature of the Tax Code that allows many assets, including property, stocks, bonds and businesses to be passed onto heirs without immediately generating tax bills. Democrats have been seeking to tax these assets for years, and President Joe Biden during his campaign endorsed the idea.
Current tax law allows many people to pass on assets to their heirs without also transferring a big capital gains tax bill from the property’s appreciation. This provision, known as stepped up basis at death, means that heirs don’t have to pay taxes on any of the gains that accrued under the previous owner. No taxes are paid at death and the inheritors only owe taxes when they sell, and only on the portion of appreciation from the time they held the asset.
The plan, released by Democratic Senators Chris Van Hollen of Maryland, Cory Booker of New Jersey, Sheldon Whitehouse of Rhode Island, Elizabeth Warren of Massachusetts, and Bernie Sanders, a Vermont independent, would levy taxes on those assets of the wealthy at death, though allowing a $1 million exemption. The bill would put a large dent in a tax break that is worth roughly $41.9 billion a year, according to the Joint Committee on Taxation.
“The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthiest heirs every year,” Van Hollen said in a statement. “It’s time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans.”
Existing tax laws provide for capital gain exclusion of as much as $500,000 for personal homes for couples, and assets held in retirement accounts would continue to not be subject to capital gains taxes. Charitable gifts would be exempt from the tax, according to the plan. The legislation would also allow for taxpayers to pay the levies over a 15-year period for illiquid assets, such as a farm or a small business.
Biden has proposed increasing taxes on the wealthy by raising personal income and capital gains tax rates and corporate taxes to pay for his broad economic and infrastructure proposal, which he’ll begin outlining this week.
President Barack Obama also sought to target the stepped up basis tax provision, calling for a significantly lower exclusion of $100,000 for singles or $200,000 for couples, which would have subjected significantly more households to the tax. Congress, then in Republican hands, blocked his proposal.