(Bloomberg) -- President Joe Biden’s coming tax package will feature an end to a major benefit for wealthy estates that drastically minimizes the levy for inheritors, along with a bump up in the top income tax rate and funding for strengthened IRS auditing, according to a person familiar with his proposal.
Ending “step up in basis,” which allows heirs to use the market value of assets at the time of inheritance rather than the actual purchase price as the cost basis for capital gains when the holdings are sold, would mean much higher tax bills for wealthy estates. Congressional Democratic proposals have exempted a share of assets from tax -- one Senate plan provides for $1 million -- but the specifics of Biden’s measure aren’t yet clear.
Biden’s plan will also include a top individual tax rate of 39.6% for those making at least $400,000, up from 37% today, according to the person, who spoke on condition of anonymity as the proposals aren’t yet public. That could affect roughly 1% of taxpayers if current income thresholds apply. The person didn’t say whether the $400,000 is also the figure for married couples filing jointly.
Biden’s measures will include $80 billion to boost the Internal Revenue Service’s audit capabilities over the next decade for wealthy individuals and corporations, a change that could generate $700 billion in revenue, according to the person. The administration has already asked for more money for enforcement in its outline for the 2022 annual budget.
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The proposals will be key elements to offset the cost of Biden’s “American Families Plan” that he’s set to unveil in a speech to Congress on Wednesday. That program, expected to cost well over $1 trillion and potentially as much as $1.8 trillion, is anticipated to feature funding for paid leave, childcare and education.
Higher income tax rates for top earners, along with a 39.6% capital gains rate for those earning $1 million or more, mean that many wealthy taxpayers will see a significant increase in the levies they owe annually and when they sell major investments, such as stocks or businesses.
Repealing the step up in basis provision would end a long-standing tax break that wipes away the capital gains on an asset when it is inherited, meaning that much of the appreciation on securities, properties and small businesses goes untaxed when the original owner dies. The provision affects appreciated assets, which would have less implication for poorer estates.
Spending billions more on audits is intended to reverse a multi-year trend of falling audit rates at the IRS. Commissioner Chuck Rettig told a congressional panel this month that as much as $1 trillion in taxes may go uncollected each year. He said the agency has lost 17,000 enforcement personnel since 2010. Democrats in Congress have been proposing ways to increase auditing levels by adding to the agency’s enforcement workforce and mandating higher examination rates of top earners.
A pot of $80 billion over a decade specifically for IRS enforcement, which averages to $8 billion in additional funding per year, would be a significant increase to the IRS, which has an annual budget for the entire agency of about $11.9 billion for fiscal year 2021.
The New York Times reported the details of Biden’s audit proposal earlier.
