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News: Biden's Proposed Tax Laws Could Close Loopholes

With many loopholes and blind spots in the tax laws, some Americans have plenty of opportunities to avoid income tax.

Justin Cupler

Contributing Writer at Tally

July 16, 2021

President Joe Biden recently proposed changes to the tax laws to help support his American Families Plan and infrastructure upgrades. Some of these changes will close tax-saving passages that wealthier Americans have been able to leverage for many years. 

Taxes and how much each income bracket contributes to the U.S. tax coffers are hot political debates. 

For example, Edward Yardeni, president of Yardeni Research,said, “The 1 Percent is paying more than 40% of federal income taxes.” On the other side, proponents of taxing the wealthy, like Natasha Sarin, deputy assistant secretary for microeconomics at the U.S. Treasury, believe tweaking tax laws on the rich could generate more than $1 trillion over the next decade. 

No matter which opinion you side with, it’s no secret that some of the wealthiest Americans can leverage various loopholes to minimize their income tax burdens. Some are well within the bounds of today’s tax laws, while others are in a legal gray area.

Here are some of the ways wealthy Americans avoid income tax and how the current administration’s plans could change that. 

Tax cuts

The 2017 Tax Cuts and Jobs Act dropped the highest income tax bracket from 39.6% to 37%. This gave the top 1%, which earn an average of $2.2 million per year, substantial cuts in yearly taxes. 

Joe Biden’s proposed tax initiatives will restore the 39.6% tax bracket for the top 1%, which would likely apply to single earners making $523,600 per year or married couples earning a combined $628,300. 

Capital gains tax

Some Americans also can take advantage of a loophole in the capital gains tax to avoid paying taxes and help their heirs avoid taxes. 

Capital gain is the profit you make from selling stocks, bonds, real estate and other personal items. For example, say you purchased a home in 1980 for $100,000, and you sell that home in 2021 for $500,000, you have $400,000 in capital gains. 

Under the current tax plan, you’ll pay 0%, 15% or 20% capital gains tax on the profit at the time of sale, depending on your income. 

Another option is to pass it to an heir after death. This helps in several ways. 

First, it keeps the gains in the family. Second, you pay no capital gains tax. Third, your heir will only pay future capital gains taxes based on the value at the time of inheritance, not the original purchase value. This latter loophole is referred to as the step-up. 

This could soon change, as President Biden’s tax plan has capital gains tax loopholes squarely in its sites. Here are his proposed terms: 

  • Increase the long-term capital gains tax — taxes on property owned for over one year — on people earning $1 million or more per year from 20% to 39.6%.

  • Impose capital gains taxes at the time of death for any property with at least a $1 million increase in value.

  • Introduce a $1 million exemption (or $2 million for married couples) estates can apply to capital gains at the time of death. So, if a home has $2 million in capital gains, the estate can use this exemption to reduce their capital gains to $1 million (or $0 for married couples).

Staying under the radar

Budget cuts forced dramatic reductions in the audits of tax returns of $10 million in adjusted gross income or more. 

President Biden’s proposal aims to curtail this by increasing resources at the IRS to audit households earning $400,000 or more annually. 

Still just a proposal

These tax-boosting proposals would support some of the current administration’s more ambitious goals, like rebuilding America’s infrastructure. However, they’re still only proposals and will have to pass Congress before becoming law. Currently, there aren’t any votes scheduled yet in the Senate or House of Representatives.