But, I’m Not Rich

A major change in the tax laws, involving estates and inheritances has been recently proposed. I read about it in this Forbes article that was published today. The bottom line of this new proposal is that if passed future heirs would see more of their inheritance disappear to pay taxes, a lot more. These tax changes are proposed to take effect at the end of the year. The article used an example that I’ll paraphrase here. Their example quotes the fictional example of kindly old Aunt Tina. Aunt Tina was a school teacher who lived frugally, but saved and invested well. Even on her teacher’s salary, starting in 1970, she was able to save $200,000 and through the miracle of compound interest over the next fifty years, her investments ballooned to its current total of $2,200,000. A tidy sum, especially for the math that is yet to come. You as Aunt Tina’s favorite nephew/niece are expected to inherit all of it. Under current law, upon her death you would inherit all of it tax free. No inheritance taxes and no capital gains taxes, a cool $2.2M tax free. However, under the new proposed rules, you, Tina’s sole heir, would have to take on or carry over the basis of the decedent. The long and the short of this is that except for the $200K that she originally invested, you the heir, would have to pay capital gains taxes on the remaining $2M, immediately. Plus if this inheritance pushed your adjusted gross income over $1M the Net Investment Income Tax would come into play, for a total tax rate of 43.4%. But wait there is more. In addition to Federal capital gains taxes, there are also state capital gains taxes and at these levels inheritance taxes also kick in. You could be looking at a 61% tax rate. Aunt Tina, please do not panic, yet. This is not yet the law. It is simply a proposal. However, the US is currently running unsustainable deficits and Biden is looking at taxing the rich. When John Dellinger was asked, “Why do you rob banks?” He answered, “Because that is where the money is.”  In addition to vaults, banks also posses an army of lobbyists. Something that Aunt Tina does not have. The next major source for taxes is the top 10% wealthiest Americans, because that is where the money is. Don’t panic! It’s hardly a done deal. It’s only chance of passage would be via a continuing resolution, with all 50 Senate Democrats voting for it, which seems rather doubtful to me at this time. 

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