Potential US Tax Changes Canadians Should Keep Their Eye On
Bradley Richard Thompson
June 10, 2021
Potential US tax changes Canadians should keep their eye on
We are now six months into a US government with a Democratic presidency and both houses of Congress. The expectation has been that there would be significant tax changes, possibly reversing some of the changes made under President Trump’s administration. In President Biden’s address to Congress and April 28 release of The American Families Plan we now have some details of what those changes may be.
Return of 39.6% federal top marginal income tax rate
President Obama had increased the top federal income tax rate to 39.6% (from 35%); in 2018 President Trump reduced this rate to 37%.
The American Families Plan proposes to re-introduce a 39.6% marginal tax rate at the highest bracket, and lower the income threshold above which this rate would apply. The brackets for different filing statuses is not made entirely clear in the proposals but should generally apply to family incomes over $400,000.
Long-term capital gains taxed at ordinary income rates for high-income households
Dating to the Obama administration, the existing highest federal tax rate on long-term capital gains is 20%. President Biden's proposal is effectively to eliminate favorable capital gains rates for families with over $1 million of taxable income. With the increase in the highest bracket long-term capital gains would be taxed at 39.6% under this proposal – nearly double the current rate.
Elimination of “step-up” at death
The United States has a pure estate tax under which large estates can be subject to graduated tax rates based on the value of the estate rather than gain latent in the estate assets (in contrast to Canada which generally taxes the gain on appreciated estate assets). The US estate tax contains progressive tax brackets up to 40%. Although the federal estate tax and the federal income tax are distinct regimes a long-standing US tax policy has been to provide a "step-up" to the basis of inherited property – the deceased is subject to estate tax, if the appreciation is not eliminated through this "step-up" then future taxation of this gain could be viewed as double taxation.
President Biden's proposal is to in effect adopt a both-and approach. Similar to Canada, there would now be a gain recognition even for appreciated assets held by a taxpayer at the time of his or her death. Additionally, if the estate is large enough it could be subject to estate tax. Unlike Canada, the American Families Plan proposes to provide an exemption from this gain recognition event for gains less than $2.5 million per married couple. It is not yet clear how a credit or deduction mechanism would operate between these two taxes.