President Joe Biden speaks at a joint congressional session in Washington on April 28, 2021.
Melina Mara | Reuters
Taxes for the rich could rise soon.
President Joe Biden plans to fund advanced education, childcare, paid vacation, and other reforms by raising more tax revenue from Americans who earn more than $ 400,000 a year.
He would do this by raising tax rates on top incomes and capital gains, changing taxation on wealthy goods, closing tax loopholes, and focusing audits on the rich to prevent tax evasion.
In total, the American Families Plan would raise $ 1.5 trillion over a decade, according to the White House, by taxing the highest earners.
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“I think you should be able to become a billionaire or a millionaire,” Biden told Congress on Wednesday evening in a speech in which he outlined his agenda. “But pay your fair share.”
The richest 1% of taxpayers, who have an average income of $ 2.2 million, would bear the burden of the tax hike, according to an analysis published by the Institute for Taxes and Economic Policy.
For two-thirds of this group, the analysis shows that taxes would increase by an average of $ 159,000 per year.
Of course, the proposal is facing headwinds in Congress. Passage is not guaranteed and parts of the schedule are subject to change.
A new top tax rate of 39.6%
Biden’s tax plan would raise the highest income tax rate to 39.6%.
This was the highest rate before the 2017 Tax Cuts and Employment Act, which was cut to the current 37%.
The 39.6% rate would apply to the top 1% of Americans, according to the White House.
Households with incomes above $ 540,000 are among the richest 1% of taxpayers, according to Garrett Watson, Senior Policy Analyst at the Tax Foundation.
However, the exact income thresholds above which the 39.6% rate would apply to individual taxpayers and married joint applicants are unclear.
They would likely correlate with the current high of 37%, Watson said. This rate applies to income greater than US $ 523,600 for a single person and US $ 628,300 for a married couple.
This aspect of Biden’s proposal would make about $ 110 billion in a decade, according to the Tax Foundation.
Biden is essentially pursuing a future change in tax legislation – the highest income tax rate is expected to drop to 39.6% per language in the law on tax cuts and jobs as early as 2025.
A doubling of the capital gain rate
The American Families Plan would also change the way the wealthy pay taxes on returns on investment in two major ways.
“These parts of the proposal would affect the richest people most for me,” said David Herzig, principal at Ernst & Young’s Private Client Services Steering Group.
For one, Biden’s plan would raise the top tax rate on long-term capital gains to 39.6% – the same rate as their wages. (Including a Medicare surcharge of 3.8%, they would pay a maximum of 43.4%.)
This would be an increase from the current 20% (or 23.8% including the additional tax on the net investment result).
The policy applies to taxpayers with annual income greater than $ 1 million – the highest 0.3% – who sell stocks, bonds, and other assets held in taxable accounts for a profit.
The rich get a much larger share of their annual income from investments compared to low earners.
Investing accounts for more than 40% of the income of taxpayers who earn at least $ 1 million a year, according to an analysis by the Tax Foundation. The other sources (business income and wages) each make up smaller proportions.
By comparison, Americans who earn less than $ 50,000 a year get around 5% of their income from investments. Wages make up more than 80%.
“It will make people think a little if they decide to sell and move on to another opportunity because of that tax bite,” Watson said.
Capital Gains Upon Death
The plan also changes how wealthy goods pay taxes on valued assets when they die – the second important part of Biden’s capital gains tax reform
Biden would get rid of what is known as the “step-up-in-base” upon death for profits greater than $ 1 million.
In essence, the increase in value of unsold assets – also known as unrealized gains – would be subject to capital gains tax after the death of the owner. (Again, this would be 43.4% for the richest households).
This regime would be very different from existing law.
Currently, the increase in the value of an asset on death is not taxed. The asset receives an increase in base, that is, it is transferred to the heirs at the current market value, which erases the capital gain. Heirs could then sell the asset free of capital gains taxes.
This is not the estate tax. It’s just about taxing the profits that were never taxed.
Principal Research Fellow at the Urban-Brookings Tax Policy Center
(Individual estates may owe a 40% estate tax on assets greater than $ 11.7 million. The threshold for married couples is $ 23.4 million.)
“This is not the estate tax,” said Gordon Mermin, a senior research fellow at the Urban-Brookings Tax Policy Center, of Biden’s proposal. “It only taxes the profits that were never taxed.”
Wealthy goods could cut off $ 1 million in tax gains on death. (It would be $ 2 million for couples.)
This exclusion would be in addition to the existing tax break for valued properties. (Single taxpayers can exclude capital gains up to $ 250,000 from tax; married couples are allowed to exclude $ 500,000.)
Let’s say a wealthy couple bought a home for $ 5 million that was worth $ 10 million at the time of their death. The estate can exclude half of that $ 5 million gain from tax – and would tax the remaining $ 2.5 million.
“The exclusion here is high enough to really target higher earners,” said Watson.
Family businesses and farms would also be excluded – they would not have to pay taxes if the business or farm were handed over to heirs who continued to run the business, according to the White House.
It’s unclear how Biden’s proposal to tax unrealized gains on death would interact with federal estate tax, experts said. (For example, could taxes on unrealized gains be deducted from the size of the entire estate?)
“Operationally, there are many questions about how this could work,” said Herzig.
Further IRS audits
The White House would also provide the IRS with additional resources to improve the tax audit of households with incomes greater than $ 400,000.
According to IRS data from the White House, which claims its enforcement plan would raise $ 700 billion over a decade, exam rates for those who earn more than $ 1 million a year fell 80% between 2011 and 2018.