Equal Tax Act
The Equal Tax Act seeks to fundamentally reshape how capital gains, dividends, and certain transfers are taxed, with a clear aim to “equalize” them with earned income. The bill would cap the favorable tax treatment for long-term capital gains and qualified dividends at a taxpayer’s income level, set at $1,000,000 of taxable income (with inflation adjustments after 2025). It would also treat gifts and bequests of many assets as a deemed sale at fair market value (with various exceptions), create an annual and inflation-adjusted exclusion for gains on transfers at death (including a special 50% exclusion for qualifying family farms or businesses), and tighten several related provisions (basis rules, reporting, like-kind exchanges, and the new Section 199A limits). Overall, the bill would increase the tax burden on higher-income individuals for capital gains and certain transfers while changing estate and basis planning rules, and would add new compliance requirements. Key components include: a $1M income-threshold limit on preferential capital-gains/dividend rates; a new deemed-realization rule at gift/death with extensive basis adjustments; an exclusion (Sec. 139J) for gains at death (with an inflation adjustment and a farm/business certification exception); expanded gift/bequest reporting; optional installment payment for death-related gains; a cap on like-kind exchanges for real estate; and revised limits on the QBI deduction. The effective date for most changes is tax years beginning after December 31, 2025.
Key Points
- 1Caps on preferential rates: Preferential rates for dividends and capital gains would apply only to the portion of a taxpayer’s income up to $1,000,000 (inflation-adjusted after 2025). For certain transfers involving a qualifying family farm or business, the calculation ignores gains realized from gifts or bequests of those assets.
- 2Deemed realization at gift/death (Sec. 1261): Property transferred by gift or at death is treated as if it was sold at its fair market value on the date of the transfer. There are notable exceptions (spouses, certain tangible personal property used in business or investment, and charitable transfers). This change also integrates with adjusted basis rules and coordination with related-party loss rules.
- 3New basis rules and gift/estate treatment: The bill eliminates carryover basis for gifts made after 12/31/2025, instead using fair market value at the time of the gift. Transfers between spouses receive a basis equal to the transferor’s basis. The rules ensure basis is consistent with gains recognized under the deemed realization rule. Effective date for these changes is transfers after 12/31/2025.
- 4Sec. 139J death-related gain exclusion: Gross income would exclude up to $1,000,000 of net capital gain from transfers at death (1261(a) triggers). For a qualifying family farm or business with certification, 50% of gains above $1,000,000 could be excluded. The exclusion is inflation-adjusted after 2026, with a 120-month minimum activity/use requirement for farms. There are recapture rules if the farm/business ceases to operate as such or ownership changes in certain ways.
- 5Reporting and administration: Gift and bequest transfers would require reporting to the IRS (with details on recipient, property description, fair market value, and basis). Recipients would receive statements. Effective for transfers after 12/31/2025.
- 6Installment payment option for death-related gains: A new 5-year installment plan allows payment of tax on capital gains arising from 1261 triggers (death-related gains) in up to five equal installments, with interest and specific rules about when payments are due. Effective for years after 12/31/2025.
- 7Limits on like-kind exchanges: Nonrecognition of gain under §1031 would be limited for nonqualified property, with annual and aggregate caps ($500,000 per year, $1,000,000 aggregate), and a narrow definition of qualified property (e.g., farming use or exchanges for similarly purposed property). Effective for exchanges after 12/31/2025.
- 8QBI deduction limitations: The 199A deduction would be further limited by capping taxable income at $1,000,000 and by changing which income is considered for the deduction (reframing the limit in terms of non-qualified business income rather than net capital gains). Effective for 2026 and later tax years.