The tax code reform framework on the table in DC does have some important ramifications for art related businesses and art collectors. The new nine-page proposal promises bigger paychecks, more jobs and a more fair tax system; however, it proposes eliminating many of the itemized deductions and lobbying groups have already become involved.
It would lower the highest individual income tax rate to 35% from where it currently sits at 39.6%. This could have ramifications for how art collectors approach their estate planning. As of right now, collectors who have taxable estates must plan to address the estate tax on their art which is an illiquid asset. Elimination of the estate tax could alter this dynamic and motivate individuals to reconsider where will their artwork go after they pass away. The tax reform proposal, however, does not address how the tax code will manage inherited assets that have appreciated in value.
Under current law, a child who inherits something that has grown in value since the time it was purchased, would be responsible for paying a stepped-up basis of the current value, such that capital gains taxes are levied on the profit from a higher basis. The proposal also does not address whether tax rates for capital gains on art would be maintained. Taxpayers may opt to categorize the profit from selling a piece of art as ordinary income or capital gains. The highest income tax bracket currently sits at nearly 40% versus the capital gains tax of 28%.
The right lawyer can help you if you need assistance with your estate planning for an art collection.