Equal Tax Act
- Bill Number
- S. 4122
- Origin Chamber
- Senate
- Congress
- 119th Congress, Session 2
- Policy Area
- Taxation
- Status
- Introduced
- Latest Action
- 2026-03-17: Read twice and referred to the Committee on Finance.
- Last Updated
- 2026-03-31T21:35:34Z
AI-Generated Summary
Purpose of the Legislation
The Equal Tax Act (S. 4122) aims to reduce tax advantages for capital gains (profits from selling investments like stocks or property) compared to earned income (wages from work). It seeks to treat these income types more equally by limiting lower tax rates on capital gains, taxing unrealized gains (appreciation in asset value that hasn't been sold) upon transfer via gifts or death, and adding reporting and payment relief measures. The goal is to ensure higher-income individuals pay more on investment income, while providing limited protections for family farms and businesses.
Key Provisions
- Limitation on Preferential Tax Rates for Capital Gains and Dividends (Section 2): Lower tax rates (typically 0%, 15%, or 20%) apply only to capital gains and qualified dividends that keep a taxpayer's total taxable income at or below $1,000,000. Gains above this threshold are taxed at ordinary income rates (up to 37%). Exceptions exclude gains from gifts or inheritances of qualifying family farms or businesses (defined as U.S. real property used for farming or family operations for at least 3 of the last 5 years). Applies to tax years starting after December 31, 2026.
- Deemed Realization of Gains on Gifts and Death (Section 3): Treats gifts or property transfers at death as if the assets were sold at their fair market value (current market price) on that date, triggering capital gains tax on any appreciation since acquisition.
- Exceptions: No tax on transfers to a spouse or surviving spouse (or spousal trusts); charitable donations; small annual gifts up to the gift tax exclusion (about $18,000 per recipient in 2024, adjusted for inflation); and most personal items unless held for business, investment, or as collectibles (e.g., art).
- Trust Rules: Special handling for grantor trusts (where the creator controls the assets), requiring taxation when control ends or upon death; other trusts taxed on transfers in or distributions out; generation-skipping trusts taxed every 30 years.
- Basis Changes: Recipients get a "stepped-up" basis equal to the fair market value at transfer (not the donor's original cost), preventing double taxation on later sales. For spousal transfers, basis carries over from the original owner.
- Applies to gifts and deaths after December 31, 2026.
- Exclusion of Gains at Death (Section 4): Provides relief for estates by excluding up to $1,000,000 in net capital gains from taxation upon death (adjusted annually for inflation after 2027). For qualifying family farms or businesses, an additional 50% exclusion on gains above $1,000,000 if certified for continued use as a farm or business for 10 years post-transfer.
- Recapture Rules: If the property stops being used as certified (e.g., sold or operations cease), a portion of the excluded gain becomes taxable over the remaining certification period, prorated monthly. Hardship exceptions apply, and buyers can assume liability.
- Applies to deaths after December 31, 2026.
- Reporting Requirements for Gifts and Bequests (Section 5): Donors or executors must report to the IRS details of applicable gifts or inheritances over small thresholds, including recipient info, property description, fair market value, and basis. Recipients get statements. Excludes certain securities and small gifts. Applies after December 31, 2026.
- Payment Extensions for Death-Related Gains (Section 6): Taxpayers (estates) can elect to pay capital gains tax from death in up to 5 equal annual installments, starting with the tax return due date. Interest accrues at 45% of the standard rate. Applies only to non-traded personal property; deficiencies prorated but not for negligence or fraud. Applies to tax years after December 31, 2026.
- Limits on Like-Kind Exchanges (Section 7): Restricts tax-deferred "1031 exchanges" (swapping similar properties without immediate tax) for real estate. Annual exclusion of gains up to $500,000; lifetime total up to $1,000,000. Unlimited for "qualified property" like farms exchanged for similar use. Applies to exchanges after December 31, 2026.
- Limits on Qualified Business Income Deduction (Section 8): Caps the 20% deduction for pass-through business income (e.g., from partnerships or S-corporations) at taxable income up to $1,000,000. Above that, no deduction, and it excludes all non-business income (not just capital gains). Applies to tax years after December 31, 2026.
Significant Changes to Existing Law
- Ends Step-Up in Basis at Death: Previously, heirs received assets with a basis reset to fair market value at death, erasing untaxed gains. Now, gains are taxed at transfer, with basis stepped up to that value for future sales.
- Taxes Unrealized Gains on Transfer: Introduces capital gains tax on appreciation during lifetime upon gifting or death, closing a major estate planning loophole (unlike current law, which defers tax until sale).
- Phases Out Preferential Rates: Capital gains above $1M lose lower rates, aligning them closer to ordinary income tax, reversing post-1986 reforms favoring investments.
- Curbs Deferral Tools: Limits 1031 exchanges and business income deductions for high earners, reducing ways to delay or reduce capital gains tax.
- Adds Exclusions and Relief: New $1M death exclusion and family farm protections; installment payments and reduced interest for estates—features not in prior law.
Potential Impacts
- On Government Agencies: The IRS gains revenue from taxing more capital gains (potentially billions annually) but faces increased administrative burden from reporting, certifications, and audits for trusts/gifts. May require new regulations and systems for compliance.
- On Citizens: High-net-worth individuals and families with appreciated assets (e.g., stocks, real estate) face higher taxes on transfers, discouraging large gifts/inheritances and encouraging sales or charitable giving. Middle-class estates under $1M exclusion see minimal change. Family farms/businesses get protections but risk recapture if sold early. Overall, shifts tax burden toward wealthier taxpayers, potentially increasing federal revenue for public programs.
- On International Relations: Minimal direct impact, though U.S. citizens abroad with foreign assets may face complex reporting; could influence global estate planning for multinational families.
Main Stakeholders Affected
- High-Income Taxpayers and Estates: Wealthy individuals, investors, and large asset holders most impacted by gain realizations and rate changes.
- Family Farms and Small Businesses: Benefit from exclusions and unlimited 1031 exchanges but must certify continued use to avoid recapture.
- Heirs and Recipients: Spouses largely protected; others get stepped-up basis but inherit reporting obligations.
- IRS and Tax Professionals: Increased workload for enforcement, advising on trusts, and processing elections/extensions.
- Charities: Indirectly benefit from exceptions encouraging donations over taxable gifts.
Notable Legal, Constitutional, or Political Implications
- Legal: Introduces anti-avoidance regulations for trusts and exchanges, empowering the Treasury Secretary to close loopholes, which could lead to litigation over interpretations (e.g., what counts as "qualified" property). Changes basis rules may conflict with prior court rulings on estate taxation.
- Constitutional: Potential challenges under the Fifth Amendment (due process/takings) if seen as retroactively taxing unrealized gains, though upheld precedents exist for realization at death. Equal protection arguments could arise from income thresholds favoring lower earners.
- Political: Addresses wealth inequality by targeting "unearned" income, aligning with progressive goals (sponsored by Sens. Markey, Sanders, et al.), but may face opposition as a "death tax" expansion, affecting estate planning and economic growth debates. Could influence broader tax reform, like Biden-era proposals, without altering gift/estate tax rates directly.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Cosponsors (3)
Sen. Sanders, Bernard [I-VT], Sen. Merkley, Jeff [D-OR], Sen. Booker, Cory A. [D-NJ]
Recent Actions
- 2026-03-17: Read twice and referred to the Committee on Finance.
- 2026-03-17: Introduced in Senate
Bill Versions
- Equal Tax Act — issued 2026-03-17 — PDF (23 pages)