Capital Gains Taxes: What to Expect with President Biden’s Tax Hike
On April 28, President Biden proposed a tax plan that resonates with most of the political interest. Though the ins-and-outs are complex, the general push is to significantly raise taxes on the wealthiest Americans. Naturally, both advocates and opponents of the plan have stated their cases, while many individuals remain uncertain of their position on the matter.
What are the pros and cons of Biden’s tax hike? How could the plan influence capital gains taxes? How could Americans be impacted socioeconomically? In what ways will businesses be affected? In the following content, we discuss what we know so far, hoping to clarify answers to these questions for curious Americans.
What Are Capital Gains Taxes?
Capital gains refers to the profit earned on the sale of an asset that has grown in value since the original acquisition of the asset. The asset could be tangible, like a vehicle or business, or intangible, like shares. As a result, capital gains taxes apply to the growth of those assets once they have been sold or “realized.”
“Unrealized capital gains,” or unsold investments, can be held appreciated without taxation for as long as you would like to hold them. Additionally, capital gains taxes can only be enforced for assets held longer than a year.
Assets held over a year, or “long-term capital gains,” are taxed by tax bracket in amounts of 0%, 15%, or 20%. Assets held under a year, such as those bought and sold by day traders, are called “short-term capital gains.” These are taxed as ordinary income.
What Are the Primary Proponents and Opponents Saying?
Major political players on both sides of the tax plan have stated their arguments.
In general, advocates of the tax hike list two benefits:
- First, taxing the wealthiest Americans could provide funds to help less affluent Americans.
- Second, taxing the wealthiest Americans could reduce income inequality.
On the other side of the argument, opponents generally state:
- First, raising taxes during an economic recession could be unwise.
- Second, raising taxes could slow economic recovery and stock prices.
While there are the above schools of thought, many Americans, however, simply do not know which “side” to take.
What Would the Proposed Tax Plan Accomplish?
Within the larger scope of the goal to raise taxes on the wealthiest Americans, President Biden has proposed three primary strategies.
- First, “the top marginal income tax bracket would rise to 6%” from 37%. Forbes Advisor continues: “The change would apply to 2022 income above $452,700 for individuals and $509,300 for a married couple, according to a report in Axios.” The income tax rate was 39.6% from 2013-2017.
- For individuals earning an income above $1 million, capital gains would be taxed at 6% (from 20%). This change in capital gain taxation is perhaps the largest change within the tax plan. Additionally, the 3.8% net investment income tax would also be added to certain state capital gains taxes, increasing the tax rate to 43.4%. This would be added to federal tax as well.
- Finally, inherited assets with an increased value of $1 million or more would also be taxed.
These strategies would ultimately funnel into Biden’s $1.8 trillion American Families Plan.
This plan ultimately was made to provide paid family and medical leave, pay for free schooling, provide tax break for low and middle-income families, reduce child-care costs, and a variety of other benefits.
Who Would the Tax Plan Affect?
As the plan implies, Biden’s tax plan will likely not feel any direct impact. One investment resource states plainly: “Unless you make a lot of money, you probably won’t feel the direct impact from the proposed changes.”
If you make more than $1 million a year, though, the tax plan would certainly impact you directly. However, only 0.3% of U.S. households fit into this category. Additionally, investors using a 401(k) may be uniquely exempt from capital gains taxation, further sliming the pool of Americans affected by the tax plan.
What Are the Pros and Cons of the Tax Plan?
- As discussed above, the tax plan will only impact only the wealthiest Americans (1%), while American Families Plan could impact many Americans, if the promises listed within the plan come to fruition.
- The tax plan could reduce income inequality.
- The prospect of significant capital gains tax increase could compel investors to sell long-term capital gains before the plan takes effect.
- Evaluations have been performed to identify if raising capital gain taxes would reap revenue. Some have concluded that, no, raising these taxes would not greatly increase revenue – in fact, the increase could cost the Treasury billions over time.
Ultimately, wealthy individuals with assets will likely utilize strategies to eliminate loss from the new tax plan.
Dana D’Auria, co-chief investment officer at Envestnet PMC, wrote: “Folks could accelerate realizing gains before the higher rate is applied…” or simply use the policy as an “opportunity to rip the Band-Aid off, sell shares with low cost basis, and better diversify their portfolio.”
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As new tax plans are proposed, our team of experts will dive into the complexities to learn how the policy may affect our current and future clients. If needed, we make changes with our customers’ best interest and bottom-line profitability in mind.
If you are interested in learning more about how bookkeeping professionals could streamline the financial facets of your organization, get in touch with our team today. We can be reached at 866-567-4258 or via our online contact form. We can’t wait to start a conversation!