April 4, 2022

Well, we're waiting...

By Kathryn Haggitt Fisher

It’s been six months since our last post on possible changes to the tax code at both the state and federal levels. Unfortunately, determining what taxes will be in effect as we head into 2023 is still analogous to nailing jello to a tree or pushing string. We can, however, provide an update and insights into some recent developments.


Washington State Capital Gains Tax
In September of last year, Washington’s legislature passed a tax of 7% on realized capital gains of over $250,000. The tax is applicable to investment assets such as stocks and bonds, but real estate gains, retirement account distributions, the sale of some sole-proprietor businesses, and other transactions are excluded.


When the tax passed, the consensus was that arguments for and against the new tax would likely be heard by the state Supreme Court. Sure enough, on Friday, March 25, AG Bob Ferguson’s office filed a notice of appeal directly with the state’s highest court.


The initial suit against the tax was brought in Douglas County in central Washington, an area believed to be favorable to its opponents. Brian Huber, a judge for the Douglas County Superior Court, said that the tax “shows the hallmarks of an income tax rather than an excise tax,” as argued by state lawmakers. He agreed with the plaintiffs that a capital gains tax is a form of income tax and is, therefore, unconstitutional under WA state law. That decision was formalized early the week of March 21, paving the way for the AG’s office to file its appeal. The decision now before the Supreme Court is whether the tax is an income tax and, therefore, unconstitutional in the state of WA, or an excise tax and, therefore, allowable.


Federal Taxes
The Biden administration released its fiscal year 2023 revenue proposals on Monday, March 28, and there has already been vocal opposition. It’s important to note that the initial proposals are the start of a lengthy negotiation process; anything that does finally pass through Congress will likely look very different.


The much-talked-about “billionaire tax” seems highly unlikely to pass, given that it needs the support of all Senate Democrats, and Joe Manchin (Democrat, West Virginia) has been vocal about his opposition.

The current highest marginal tax rate of 37% is scheduled to revert to 39.6% for the 2026 tax year. Biden’s proposal is to accelerate the reversion, bringing the 39.6% rate in effect beginning with the 2023 tax year.


Long-term capital gains and qualified dividends for taxpayers with income of $1 million or more would be taxed at ordinary income rates, resulting in an increase to the top capital gains tax rate from 23.8% to 43.4% to the extent that the taxpayer’s taxable income exceeds $1 million.


Currently, gifts of appreciated assets are not taxed at the time of transfer. The recipient takes on the donor’s cost basis and does not pay taxes until they sell the asset. Under Biden’s proposal, capital gains on gifts of appreciated assets would be taxed to the donor at the time of the gift transfer, just as if the asset had been sold. There is an exclusion for transfers to a spouse, as well as accommodations for sales of family-owned and -operated businesses.


The current step-up in basis allowed at death would be eliminated and capital gains would be payable by the estate. Personal property, such as furniture, would be excluded, as would certain small business stock. This was in the original Biden plan but was not included in the Ways & Means Committee recommendations back in September.


We still don’t know what tax reform, if any, will be passed through Congress and whether the 7% capital gains rate for Washington state will be upheld. It’s safe to say that taxes won’t be going down anytime soon, but beyond that, it’s difficult to recommend any strategies to address tax policy that hasn’t yet been passed into law. Adding to the challenge are volatile markets, and we don’t expect them to settle down anytime soon. Your Fulcrum team is here to help you navigate this turbulence and determine the best approach given your personal situation. Please don’t hesitate to reach out to your team.

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