During his first joint address to Congress last night, President Joe Biden highlighted the progress the United States has made on pandemic recovery and laid out his strategy to create additional jobs and lift more families out of poverty. The key to that strategy is his American Families Plan, a comprehensive package that would invest $1.8 trillion in education, childcare, nutrition assistance, and paid leave.
The American Families Plan includes critical tax reform to ensure that the wealthy pay what he calls their “fair share” of taxes in order to finance essential investments in workers and families, including childcare, nutrition, higher education, and more. One of those overhauls is a change in the way capital gains are treated in our tax system so that, for people making over $1 million, the tax system no longer favors income from wealth over income from work. The plan won’t raise taxes on anyone making less than $400,000 a year.
Part of Biden’s plan to make sure the wealthy pay more in taxes is a proposal to close the “stepped-up basis” loophole for wealthy estates so that enormous fortunes do not completely escape taxation. Under the proposal, unrealized capital gains (those that have never been previously taxed) are taxed at death above $2 million in gains per couple.
However, the U.S. Department of Agriculture points out how this largely won’t affect family farms that stay in the family.
Under this proposal, estimates indicate more than 98 percent of farm estates will not owe any tax at transfer, provided the farm stays in the family. The tax the remaining less than 2 percent would owe, would be on their non-farm assets.
The American Families Plan protects family farms and ranches in two key ways:
- No capital gains taxes at death for family farms. This plan includes a special protection for family-owned farms and businesses. It defers any tax liability on family farms as long as the farm remains family-owned and operated. No tax is due if the farm stays in the family. No one should have to sell a family farm they inherit to pay taxes and the President’s tax reform guarantees that.
- $2 million exclusion from increased capital gains for all married couples. This plan also excludes the first $2 million of gains per couple ($2.5 million if the farm also includes the family home) from capital gains tax and heirs continue to get step up in basis on those first $2 million in gains. If an heir decides to sell the family farm, the first $2 million in gains is tax free.
How the president’s capital gains reforms affect family farms:
- A married couple with $900,000 of farm gains and $200,000 of non-farm gains passes the farm onto their children. No capital gains taxes are owed, even if they sell the farm because the $1.1 million in gains are below the $2 million per-couple exemption.
- A married couple with $3.0 million of farm gains and $250,000 of non-farm housing gains passes the farm onto their children. No taxes due as long as the children keep the family farm.
To learn more about the American Families Plan, see the fact sheet.