President Biden will likely propose almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help with social spending that addresses inequality.
Although the plan is not yet public, people familiar with the proposal have indicated that for those earning $1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could reach 43.4%. A new marginal 39.6% rate would be an increase from the current base rate of 20%. The existing 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income.
This proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. President Biden campaigned in part on equalizing the capital gains and income tax rates for wealthy individuals, stating that it’s unfair that many of them pay lower rates than middle-class workers.
The Biden administration has also recently indicated its desire to enhance the estate tax for the wealthy. The current estate tax exemption of $11.7 million per individual (and $23.4 million per couple) could be reduced by approximately 50%. The step-up in basis at death, which increases the tax basis for inherited assets to their full fair market value upon death, could also be repealed.
These proposals are likely to be released soon in the administration’s forthcoming “American Families Plan”, which is expected to include a new wave of spending on children and education, including a temporary extension of the expanded child tax credit.
According to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform, the capital gains increase would raise $370 billion over a decade.
OTHER POSSIBLE PLAN DETAILS
- The top individual federal income tax rate could rise from 37% to 39.6%.
- The corporate tax rate could increase from 21% to 28%, and a 15% alternative minimum tax could apply to corporate book income of $100 million and higher.
- Individuals earning $400,000 or more could pay additional payroll taxes.
- The maximum Child and Dependent Tax Credit could rise from $3,000 to $8,000 ($16,000 for more than one dependent).
- Tax relief could be offered for student debt forgiveness and the first-time homebuyers tax credit could be restored.
- The social security tax could be extended to higher income levels.
The outline of the previously-referenced “American Families Plan” is expected to include measures aimed at helping Americans gain skills and have more flexibility in the work force. The details of the plan remain a work in progress and could also change before the announcement.
THE BOTTOM LINE
Under the expected plan, federal taxes imposed on corporations and wealthy and higher income taxpayers would increase. Lower-income individuals’ rates generally would not change and families would be entitled to expanded credits and deductions.
If you should have questions or concerns regarding these issues, please contact Lin Law LLC at (920) 393-1190.