How Super-Wealthy Americans Fare Under Biden's New Tax Plan

Arguing that the gap between rates for investors and workers isn't fair, Biden pushed for almost doubling the top capital-gains rates. He also proposed taxing capital gains at death — to make sure that rich families can't forever avoid paying taxes on the wealth they've accumulated.

Close Loopholes

Both ideas were dropped when House Democrats proposed their plan last month, but their bill did other things to close loopholes and make sure the wealthy eventually pay taxes on their fortunes.

The plan would have tightened rules on the estate and gift tax, and made the 40% levy on transfers of large fortunes much harder to avoid. Using loopholes that have been left open for decades, the super-rich can pass billions of dollars to heirs tax-free.

Democrats also were unsuccessful in efforts to put restrictions on individual retirement accounts, or IRAs, worth more than $10 million. The measure was aimed at wealthy people who, despite rules designed to limit IRA contributions, have managed to get large fortunes into the tax-advantaged vehicles.

The most extreme example may be venture capitalist Peter Thiel, who amassed $5 billion in a Roth IRA, according to a ProPublica report citing confidential tax records.

Senator Chris Van Hollen, a Maryland Democrat who wrote an early version of the millionaires' surtax proposal, said in an interview he's been talking with Wyden about adding language to the final bill that would do more to tax inter-generational wealth with a scaled-down version of Biden's proposal.

It would require heirs to pay taxes on the entirety of the built-up gain on inherited assets if they sell.

Wealth advisers are already considering ways to make sure their clients don't pay the new surtax, and an obvious strategy is ensuring their taxable incomes stay below $10 million. People selling businesses are likely to spread sales over several years, said Jere Doyle, estate-planning strategist at BNY Mellon Wealth Management.

"Rather than selling a company in a lump sum of $100 million, you'll structure the deal to get $9 million over 11 years," Doyle said.

Another way is to "spread the wealth across your family," said Beth Shapiro Kaufman, an attorney at Caplin & Drysdale, so that income ends up with children or grandchildren who aren't near the $10 million or $25 million threshold. "Finding ways to shift income to people who are not subject to the surtaxes would be one of the primary goals."

'Accelerating Income'

Because the surtax isn't slated to go into effect until 2022, rich investors and business owners can make sure they're selling assets or booking income this year before their rates jump.

"There are definitely things they can do between now and the end of the year," said Timothy Speiss, a tax partner in EisnerAmper's personal-wealth advisers group. "You want to be accelerating income now."

The tax burden on wide swaths of the top 1% would actually drop if, as many Democrats are demanding, the bill includes a repeal of the $10,000 cap on the state and local tax deduction, according to Marc Goldwein, a senior vice president at the Committee for a Responsible Federal Budget.

Democrats are considering making the so-called SALT deduction unlimited, at least for 2022 and 2023, which would mean about a $70 billion-a-year tax cut for the highest-income households, he said. That compares to roughly $40 billion a year in tax increases in the current bill.

Democrats are likely in for a "rude awakening" when they get the data from Congressional estimators about how their tax policies are distributed across income groups, Goldwein said.

Though many of the most potent provisions aimed at super-rich Americans appear to be off the table, "I don't think we can count on this being the deal," Kaufman said. "I would not be surprised to see something else on the table next week."

IRS Funding

The framework still contains a few provisions that could squeeze some member of the top 0.1%. To make sure taxpayers don't avoid the surtax by shifting assets into trusts, the bill sets a far lower threshold for such vehicles: $200,000 for the 5% rate and $500,000 for the additional three points.

That puts a much higher tax burden on some of the entities that rich Americans use to transfer wealth to heirs, including increasingly popular dynasty trusts set up for multiple generations.

The framework also gives the IRS $80 billion more funding, an effort to make sure high-income taxpayers aren't cheating on their returns. And while the top corporate tax rate isn't rising, the bill would tighten rules so that U.S. corporations, especially tech companies, pay higher tax bills.

"It's not everything we want, but I'm not disappointed," said Senate Banking Committee Chair Sherrod Brown, an Ohio Democrat. "We're making the tax system much fairer than it was."

Progressive activists vow to continue pushing for new ways to tax billionaires, including trying to make taxes an issue in next year's Congressional elections.

"This is going to be a key test for candidates," said Frank Clemente, executive director of Americans for Tax Fairness. "We're going to run on this, that billionaires need to be paying their fair share and they need to be paying taxes on the increase in their assets."

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