What’s Your Maximum Tax Bracket at Death?

We have previously posted on the Biden Tax Proposal related to estate taxes.  In this post, we will try to calculate the maximum tax rate assuming most of the provisions are enacted.

Let’s assume we have a farmer who passes away in 2023 when the maximum estate tax rate rises to 45% and the maximum capital gains tax rate is 39.6% plus the net investment income tax of 3.8% or 43.4%.

The farmer lives in Oregon where the top individual income tax rate is 9.9% and we assume they own some property in Washington state at the top estate tax rate of 20%.  We will assume that the capital gains tax at death is due and that there is no basis in the asset (this is worst case).

Therefore, our total estate and income tax rate would be as follows:

• Federal estate tax rate – 45%
• Washington estate tax rate – 20%
• Less credit on federal estate tax return for state estate tax – (9%)
• Federal capital gains tax rate – 43.4%
• Oregon capital gains tax rate – 9.9%
• Less credit on federal estate tax return for capital gains taxes – (24%)

Total combined income and estate tax of 85.3%.

Now your heirs would get a step-up in basis since the capital gains tax is due at death but they would need to use about 85% of it to pay for the estate and income tax due at death.

Now, this is the worst case scenario, but as you can see the combined tax rates can add up very quickly in certain situations.  Some farmers may want to gift during lifetime to escape these taxes.  However, the Biden proposal also seems to decouple the gift tax from the estate tax and impose a gift tax once you go over $1 million of gifts and the capital gains tax would still be owed.

On another note.  There are already various non-farm groups proposing that all small businesses should be allowed to use gross income instead of net income to arrive at the PPP loan amount for “owner’s income”.  It would not surprise me that this gets placed into the new stimulus bill that is being worked on by the House right now.  

As we know there is a lot of confusion regarding whether partnerships, corporations and LLCs are allowed to use gross income off of Schedule F line 9.  I have seen many banks allow it (based on emails and phone calls with affected farmers) but by far more banks are only allowing it for a Schedule F filed on Form 1040.

Will this get resolved before March 31?  We don’t know, but will keep you posted.