S. 4122 — Equal Tax Act

This section limits preferential tax rates on qualified dividends and net capital gains under IRC §1(h) to the portion of such income that does not cause a taxpayer's taxable income to exceed $1 million (computed after other taxable income). It excludes from that computation gain from the gift or bequest of a qualifying family farm or business (as described in §139M(c)). The amendments apply to taxable years beginning after December 31, 2026. (Thus, such dividends and gains exceeding the $1 million threshold are taxed at ordinary income rates.)

This section establishes a new requirement under IRC §1261 for taxpayers to recognize capital gain as if appreciated property transferred by gift or at death were sold at fair market value on the date of transfer, subject to exceptions for (1) transfers to a spouse, surviving spouse, or qualified spousal trust; (2) charitable contributions; (3) gifts not exceeding the annual exclusion amount under IRC §2503(b) (currently $18,000 per donee, indexed for inflation); and (4) tangible personal property other than that held in a trade or business, for investment, or as collectibles. The section applies special rules to trusts, including treating certain grantor trust property as transferred upon loss of grantor ownership or estate includibility; other trust property upon transfer to the trust; trust modifications or distributions as transfers to prevent avoidance (per regulations); generation-skipping trusts every 30 years; and qualifying spousal trust property upon spousal beneficiary death, non-spousal distribution, or cessation as a qualifying spousal trust. This section further (1) coordinates with IRC §267 related-party loss rules by exempting property treated as sold at death; (2) revises IRC §1015 gift basis rules to provide fair market value basis for gifts after December 31, 2026 (from carryover basis); and (3) amends IRC §1041 spousal transfer rules—including at death—to provide carryover basis to the transferee (from fair market value), with conforming changes to IRC §1014.

This section establishes a new exclusion from gross income under new IRC §139M for (1) up to $1 million of net capital gain in the taxable year from transfers at death occurring after December 31, 2026, to which IRC §1261(a) applies; and (2) for real property certified to continue as a qualifying family farm or business (i.e., used for farming purposes or as a family business for at least 3 of the prior 5 years, per IRC §2032A definitions) for a 120-month period post-transfer, 50% of such gain exceeding $1 million (with prorated recapture tax upon earlier disposition or cessation of qualifying use, subject to hardship and transfer exceptions similar to IRC §§121 and 2032A). The $1 million threshold is indexed for inflation for taxable years after 2027 (using 2026 as the base year and rounding down to the nearest $10,000). (Thus, heirs of family farms or businesses receive enhanced relief from potential capital gains tax on inherited appreciated assets, provided qualifying use continues for 10 years.)

This section establishes a new information reporting requirement under IRC §6050BB for "applicable transfers" after December 31, 2026—defined as certain gifts (excluding covered securities) and transfers at death (excluding covered securities) taken into account under IRC §1261, with gain from the latter includible in gross income. For such transfers, the donor or executor must report to the IRS and furnish a statement to the recipient with the recipient's name and taxpayer identification number, a description of the property transferred, and the property's fair market value and basis to the transferee, as prescribed by regulation.

This section establishes new IRC §6168, which allows taxpayers to elect to pay in up to five equal annual installments the portion of income tax attributable to capital gain recognized under IRC §1261 (i.e., certain gains accelerated upon the taxpayer's death) with respect to eligible property (i.e., any property other than actively traded personal property). The first installment is due with the tax return for the year of the gain, with interest on unpaid balances accruing at 45% of the normal underpayment rate under IRC §6601(k) (newly added) and paid annually; deficiencies are prorated to installments (except those due to negligence, disregard, or fraud), and the Secretary may require security under §6165. The provision also coordinates assessment periods under §6109(g) (newly added) with the final installment due date and applies to taxable years beginning after December 31, 2026.

This section limits the nonrecognition of gain from like-kind exchanges of real property that is not qualified property—defined as property used for farming purposes or exchanged for property serving the same specific purpose—to $500,000 per taxable year and $1,000,000 in the aggregate across all taxable years. (Like-kind exchanges under IRC §1031 allow taxpayers to defer capital gains tax on the exchange of similar properties.) The limitations apply to exchanges after December 31, 2026.

This section revises the limitation on the qualified business income deduction under Section 199A of the Internal Revenue Code from 20% of taxable income over net capital gain to 20% of the excess of (1) so much of taxable income as does not exceed $1 million over (2) all income other than qualified business income. The changes apply to taxable years beginning after December 31, 2026.