Obama to 1 Percenters: “Show Me the Money”

1To the critics who thought that Barack Obama was going to be a lame duck leader during his last two years in office, it might be true that your respective goose might just be cooked. If anything, it seems like the mid-term elections, and the Democratic defeat at the polls, have reenergized the President and given him more confidence to go after some pretty big changes that have only been danced around for the past several years. And there is no denying that Obama is eyeing certain groups when it comes to the changes that he is committed to making.

One percenters—we are talking to you. The change that Obama is proposing is going to come from your pockets—and will target long term estate planning and living trusts, says living trust attorney Max Alavi from an Orange County based living trust firm.

Shrinking Loopholes and Growing Revenue

In the recent 2015 State of the Union, President Obama made his objectives quite clear: The wealthiest Americans have not been paying their fair share during Tax time and that needs to change. One of Obama’s most aggressive new tax proposals comes in the form of eliminating stepped up basis, also known as “the single largest capital gains tax loophole.” Here are the facts about stepped up basis:

  • Right now, stepped up basis allows heirs of an estate to use the date of death value of capital assets as opposed to a decedent’s actual basis for capital gains purposes. It allows stocks, bonds, real estate, as well as other assets that have appreciated to be transferred at the time of death without paying capital gains taxes.
  • This policy has long been tied to federal estate tax. So if the heirs of an estate need to pay estate tax, then they are not held responsible for paying capital gains.

Keeping these factors in mind, Obama is proposing the following:

  • No capital gains tax would be due until the second spouse dies—this provides an exemption up to $200K per couple and $100K per individual. The exemption would be portable between a married couple, just like it is for federal estate tax.
  • Personal residences, up to $250K per individual, along with tangible personal property (furniture, clothing, and other small ticket items) would also be exempt. However, expensive art and other collections would not be exempt here—keep that in mind if you have a Monet hanging in your living room right now.
  • Small, family-owned business are also exempt unless and until the business is sold.

The President is also proposing that capital gains and dividend rates be increased for the wealthiest Americans—up to 28 percent instead of the current 20—thereby returning these rates to what was present when Ronald Reagan was president. It’s important to note that this doesn’t affect the Average American Joe—only couples who earn more than $500K annually are going to feel the change.

While these reforms have been met with some pushback from Republicans (and even a couple Democrats), it is expected that if Obama can get these initiatives passed, this new tax policy will generate over $320B in new revenue—not exactly what we would call pocket change.