Equal Tax Act
The Equal Tax Act would fundamentally reshape how capital gains, earned income, and related tax benefits are treated in the U.S. tax system. The bill tightens or removes several preferential treatments for high-income earners by capping the use of lower tax rates on dividends and capital gains to those with taxable income up to $1 million (with an adjustment for inflation in future years) and by introducing a deemed realization framework for gains at the time of gifts and at death. It also changes basis rules (how much a property is worth for tax purposes when it’s sold or transferred) and creates new reporting, installment payment, and like-kind exchange limits. A key feature is the creation of an exclusion for gains on transfers at death (up to $1 million per taxpayer, with special relief for qualifying family farms or businesses), plus a set of rules to ensure that gains recognized through death or gift are taxed in a manner that aligns with capital gains treatment more broadly. The bill would also extend the time to pay certain death-related gains, cap the section 199A qualified business income deduction, and require reporting on certain gifts. In practical terms, if enacted, the plan would reduce or phase out some current tax advantages for very high-income individuals with large capital gains, while providing targeted relief for family farms and qualifying farms/businesses through an upfront exclusion and future inflation-adjusted amounts. It would also increase compliance requirements for gifts and transfers and change how basis is calculated for gifts and inherited property, potentially raising tax liability on gains recognized at gift or death unless offset by the new exclusions.
Key Points
- 1Cap on preferential tax rates for dividends and capital gains:
- 2- Preferential rates would apply only to the portion of a taxpayer’s income that does not push taxable income above $1,000,000 (with adjustments for inflation after 2025). Transfers of gains from a qualifying family farm or business are treated specially for this cap.
- 3Deemed realization of gains at gift or death (Sec. 1261):
- 4- Property transferred by gift or at death is treated as if it were sold for fair market value on the transfer date, with several exceptions (e.g., transfers to a spouse, certain tangible personal property, and charitable gifts).
- 5- Rules cover trusts, generation-skipping transfers, and special spousal trusts to prevent avoidance.
- 6- Basis rules are aligned to reflect this deemed sale, including new treatment for gifts to avoid carryover basis.
- 7Exclusion of gains on transfers at death (Sec. 139J):
- 8- Gross income would exclude up to $1,000,000 of gains from transfers at death (1261), with an additional 50% exclusion for gains above $1,000,000 if the property is a qualifying family farm or business and the owner certifies it will be used as such for at least 120 months.
- 9- Inflation adjustments begin after 2026; rounding rules apply.
- 10- Recapture provisions exist if the farm/business ceases operation or ownership changes in a way that would re-trigger tax.
- 11Information reporting of gifts (Sec. 6050Z):
- 12- Donors or executors must report to the IRS certain gift/bequest information, including recipient details, property description, fair market value, and transferee basis, with statements to recipients.
- 13Extension of time for payment of capital gains on death-related gains (Sec. 6168):
- 14- Tax on gains recognized under 1261 due to death may be paid in up to five installments (not exceeding 5 years), with interest and a set payment schedule.
- 15- Applies to eligible property (excluding certain readily tradable personal property) and requires an election by the due date of the return.
- 16Limitation on like-kind exchanges to avoid tax on real estate gains (Sec. 1031(a)(4)):
- 17- An annual limit of $500,000 per taxpayer on gain excluded from recognition, with a lifetime aggregate limit of $1,000,000.
- 18- Qualified property is real property used for farming or exchanged for property serving the same purpose.
- 19Limitation on the deduction for qualified business income (Sec. 199A):
- 20- The deduction would be limited so that only up to $1,000,000 of taxable income is eligible, and only non-qualified business income would count toward the deduction.
- 21Effective dates:
- 22- Most of the above changes apply to transfers after December 31, 2025 (with several provisions tied to taxable years beginning after 2025).