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Biden’s Capital Gains Tax Increase: What It Means for Your Taxes



President Joe Biden speaks before a joint session of Congress

President Biden, speaking before a joint session of Congress, explains how tax increases for the wealthy will pay for his American Families Plan.

Bloomberg / Getty Images

President Joe Biden proposes paying his massive $ 1.8 trillion American Families Plan by imposing taxes on wealthy investors. Specifically, the plan calls for higher taxes on capital gains for those making $ 1 million or more per year. The highest tax rate on long-term capital gains – that is, the return on the sale of stocks or other investments – would increase from 20% to 39.6%.

In addition to helping pay for Biden’s ambitious plan to increase education and childcare spending, the White House sees the tax increase as a way to end what it sees as one of the most unfair dynamics of the current tax system. “that the tax the rich pay on capital gains and dividends is lower than the tax rate that many middle-class families pay on their wages. “

Under the proposal, the top 0.3% of US households would pay the same rate on all income, which would contribute to “aligning the rate paid on return on investment and wages,” according to a fact sheet from the White. House (pdf).

Below, we outline the implications for taxpayers – and how they differ for wealthy Americans, middle-class Americans, and low-income Americans – and what the plan represents politically.

What exactly does Biden propose?

Biden unveiled the American Families Plan last week during his first speech to Congress. The proposed $ 1.8 trillion investment includes a universal kindergarten, free community college, a plan to make childcare more affordable, and a federal family and medical leave program.

It follows the announcement of a separate at the end of March $ 2.25 trillion infrastructure package, called the American Jobs Plan. That incentive plan covers everything from road projects to deploy broadband in rural America and would be funded through corporate tax increases.

And if you keep up, both plans come on the heels of yet another stimulus package, the $ 1.9 trillion American rescue plan, which Biden signed into law in early March to address the toll of the pandemic. Some aspects of the new families plan extend or extend the already existing tax cuts in the coronavirus aid package, such as tax credits for children and dependent and childcare.

Change in the rules for capital gains

To pay for the American Families Plan, the administration is calling for a 39.6% tax rate on long-term capital gains – about double the current rate – for people with incomes over $ 1 million, which would have an impact at about 0.3% of US households. Biden sees it as a way to reward work rather than reward wealth. When combined with an existing Medicare surtax on investment income created by the Affordable Care Act, the federal capital gain rate would come out at 43.4%.

“This is a pretty big rate change,” said Garrett Watson, senior policy analyst at the Tax Foundation, “and could encourage taxpayers subject to the higher rate to hold assets with unrealized gains in order not to be subject to the tax rate. . ” According to Watson, approximately 500,000 households made more than $ 1 million in 2018.

It should be noted that short-term capital gains, which are classified as gains on assets held for one year or less, are already taxed under current law as ordinary income – such as wages. The proposed increase would only apply to long-term capital gains or to capital gains held for more than one year.






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Closing the loopholes

In addition to raising the tax rate on capital gains, Biden is also proposing to eliminate the so-called “step-up in basic” loophole that allows investors to avoid taxes on wealth by holding stock or other assets until they die. At that point, those assets are transferred to their heirs at current market value, so there is – on paper at least – no profit to tax. With Biden’s plan, the first $ 1 million in profits passed on from each deceased person would remain tax-free. And a couple could pass on $ 2.5 million in profits tax-free to their heirs.

Biden says the plan’s tax reforms – including reinforced enforcement efforts – will bring the government an additional $ 1.5 trillion in revenue over a decade. But that assumes passing both the capital gains tax increase and eliminating the base backlog step-up. Some warn that the former, without the latter, could cost the US billions because the wealthy can just use the loophole more regularly to avoid tax.

Increase taxes for the rich

As part of a larger tax reform effort to ensure that “the rich must play by the same rules as everyone else,” Biden has proposed raising the top income tax rate from 37% to 39.6%. That would restore the rate for the 1% richest Americans to where it was before President Donald Trump’s 2017 tax cuts. It’s worth noting that the highest income rate has been much higher at other times in US history, including a peak in wartime of 94% in 1944 and 1945. It was in the 70% range for much of the 1970s and in the 50% range. according to a chart prepared by the Tax Policy Center.

The plan also includes other changes targeting the richest Americans, including closing the carry rate loophole that allows hedge fund partners to pay a lower tax rate on certain income; ending a tax break that allows real estate investors to defer capital gains tax when they exchange real estate; and the accumulation of IRS control and enforcement on high earners, large corporations and large estates.

What does it mean to the rest of us?

If you’re making less than $ 1 million annually, you probably won’t feel the direct impact of these proposed changes. In fact, those who earn less than $ 400,000 can take advantage of extensions and extensions to programs such as the child tax credit, earned income tax credit and tax credit for children and dependent care.

And there are plenty of non-tax-related benefits for most Americans, too. The plan would provide a free kindergarten for all 3- and 4-year-olds and two years of free community college; ensure that low and middle income families do not have to spend more than 7% of their income on childcare; and, among other things, establish a federally paid family and medical leave program.






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Does it have a chance politically?

While Democrats have tight control over the House and Senate, giving them the power to pass tax increases without Republican backing, it will take near-unanimous support from the party to pass this bill. And there is already some skepticism about the plan – not just from the GOP, but from the Democrats as well.

A major concern is that raising interest rates on capital gains would encourage investors to hold on to assets. At least that’s one of the reasons advocates have used to keep the rate so low over the years. An adjacent argument is that low interest rates stimulate investment and help investors keep up with inflation.

Senator Bob Menendez, a Democrat from New Jersey who serves on the Senate Finance Committee, said he is concerned about how the surge in capital gains might affect “the ability of growth to continue.”

“That’s how I judge it,” he said according to The Wall Street Journal. “At the moment it seems like a fairly high rate to me.”

Republicans, as expected, are united in opposition to the changes in capital gains because of their potential impact on the economy.

According to Watson of The Tax Foundation, the capital gain rate can eventually be increased, but not quite to 39.6%

“If the rate is raised well above 28-30%, the government could start to lose revenue because taxpayers no longer realize profits,” he said.

If the plan makes it through Congress, it will remain unclear when the proposed tax increases would go into effect – just one of many unknowns. As such, financial experts warn that it is much too early for investors to think about selling assets.


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