H.R. 5336: Equal Tax Act

This bill, titled the Equal Tax Act, aims to revise tax treatment for capital gains and gifts under the Internal Revenue Code. Here are the key provisions in layman's terms:

1. Capital Gains and Income Tax Rates

• It proposes to limit the preferential tax rates on capital gains and dividends to individuals whose taxable income does not exceed $1 million. This means that only those earning less than $1 million would benefit from lower rates on these types of income.
• The bill excludes gains from the transfer of qualifying family farms or businesses when calculating this limit, ensuring these entities receive preferential treatment regardless of their income status.
• The changes apply to taxable years beginning after December 31, 2025.

2. Capital Gains Tax on Gifts and Deaths

• When property is transferred as a gift or upon death, it will now be treated as if it was sold for its fair market value at the time of transfer. This means the person receiving the gift or inheritance may have to pay taxes based on the increased value since the original owner's purchase.
• The bill includes exceptions for transfers of property between spouses and for certain tangible personal property used for trade or business.
• It will not affect charitable contributions, meaning gifts to qualified charities remain tax-exempt.

3. Capital Gains Exclusion for Death Transfers

• The act allows for a partial exclusion of capital gains from death transfers. Up to $1 million of net capital gain received from a deceased person’s estate will be excluded from taxable income. For qualifying family farms or businesses, an even larger exclusion of 50% of the gain over $1 million is allowed, provided they meet specific conditions.
• The bill includes a provision for adjusting these amounts for inflation in future years.

4. Reporting Requirements for Gifts

• Individuals making significant gifts (those that would be included in capital gains calculations) or executors managing estate transfers must provide additional information to the IRS, including details about the recipient and property value.

5. Installment Payment for Capital Gains Taxes

• The bill allows taxpayers who incur capital gains taxes due to property transfers at death to pay their tax in installments over five years, providing a more manageable approach to tax payment for substantial tax liabilities that may arise when inheriting property.

6. Limitations on Like-Kind Exchanges

• It introduces a cap on the ability to defer taxes through like-kind exchanges for real estate, limiting the relief to $500,000 annually and a total of $1 million over a taxpayer's lifetime for properties not deemed as "qualified properties." Qualified properties must be used for farming purposes or for similar exchanges.
• This measure takes effect for exchanges made after December 31, 2025.

7. Limitations on Qualified Business Income Deductions

• It adjusts the rules regarding deductions for qualified business income. The maximum income level to qualify for full deductions is set at $1 million, ensuring that only taxpayers below this threshold can take advantage of the full deduction benefits.

Relevant Companies

• None found