President Obama recently gave his State of the Union address. In the address, he mentions at least two tax proposals which would substantially impact our clients and both involve the taxation of capital gains.
First, the President proposes to move the top capital gains (and dividend) tax rate to 28%. For those with only earned income, like wages and salary, this would have no impact. However, for those with substantial unearned income like dividends or gains on the sale of capital assets, this could have a huge impact.
Second, the President proposes to do away with the step-up in basis, currently found in section 1014 of the IRC. The President would make most bequests and gifts realization events. In other words, it would be like a sale in that the gain would be recognized. The proposal would exempt things like “small, family-owned and operated businesses [presumably including farms] – unless and until the business was sold” and those to charities.
My first impression was that these proposals have about as much chance of passage as a snowball surviving outdoors in Phoenix in July. That is because these proposals would require passage through a Republican-controlled Congress which does not have a history of liking this Administration’s proposals in general or tax hikes in particular. However, there might be some compromise that could be achieved. Perhaps the step-up in basis and increased capital gains rate could be traded for a decrease in rates on ordinary income.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
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