If you haven’t heard yet, President Biden’s latest $7.3 trillion budget for FY 2025 is making headlines with some major tax changes. The President is pushing for a nearly doubling of the capital gains tax rate, along with a new minimum tax on billionaires and a hike in Medicare taxes. While the White House is optimistic, suggesting these changes, along with new tax breaks for homebuyers and other lower-to-middle-income groups, could cut deficits by about $3 trillion over the next decade, there’s still a lot to unpack.
With Vice President Kamala Harris now the Democratic frontrunner for the 2024 presidential race, many are wondering if she might take an even tougher stance on capital gains taxes.
Curious about how these changes could affect you? Keep reading as we dive deeper into what this all means and what you need to know.
How the Proposed Increase in Capital Gains Tax Could Affect Your Investments
If you’re holding assets and thinking about selling them, here’s what you need to know. Currently, if you sell an asset you’ve owned for over a year, the highest capital gains tax rate you’ll face is 20%. This rate is applied to the profit from selling or trading assets and depends on your total taxable income and the type of asset.
President Biden’s budget proposal for FY 2025 suggests a dramatic increase in this rate. For those with an annual income of at least $1 million, the long-term capital gains tax rate could jump to 39.6%. This near doubling of the rate could have a big impact on high-income investors.
Additionally, there’s talk about a separate plan that might push the capital gains tax rate even higher. This plan could increase the net investment income tax rate by an extra 5% for incomes over $400,000 and raise the top ordinary income tax rate to 39.6%.
Biden’s Budget Targets Stepped-Up Basis: What You Need to Know
In a significant shift, President Biden’s new budget proposes to end the “stepped-up basis” rule for gains exceeding $5 million per person and $10 million per couple. Currently, this rule allows heirs to inherit assets at their current market value, rather than the original purchase price. This means they can avoid paying capital gains tax on the appreciation that occurred during the previous owner’s lifetime.
This change is aimed at addressing concerns that the stepped-up basis disproportionately benefits the wealthy and contributes to income inequality. If the proposal becomes law, any gains above these thresholds would be taxed unless the property is donated to charity. However, the plan includes safeguards to protect family-run businesses and farms, ensuring they won’t face taxes when passed on to heirs who continue to operate them.
Medicare Tax Increase for High Earners
If you earn more than $400,000 a year, including wages, salary, and capital gains, be prepared for a potential tax hike. Biden’s FY 2025 budget suggests increasing the Medicare tax rate on income over that $400,000 threshold from 3.8% to 5%.
With over 60 million people relying on Medicare, mainly those over 65, this move aims to address concerns about the program’s long-term viability and fund the Medicare Trust Fund for at least 25 more years. The idea is to channel this extra revenue directly into the Trust Fund, helping to maintain benefits without cuts.
However, with Congress divided and the 2024 election on the horizon, it looks like this change won’t take effect immediately
Income Tax Rate Means
Under his new budget plan, those making $400,000 or more would see their top income tax rate increase to 39.6%. This is a jump from the current top rate of 37%, which was set by the Tax Cuts and Jobs Act (TCJA) during the Trump administration.
It’s important to note that Biden’s proposal is still just that—a proposal. With the current political climate, it’s uncertain whether this plan will pass Congress this year. For now, the existing income tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% remain in effect, with brackets adjusted annually for inflation.
Minimum Tax for Billionaires and Why It Matters
The idea behind this “wealth tax” is to address a significant issue: wealthier individuals often manage to avoid paying taxes on a substantial portion of their income. This is largely because their wealth grows through investments, which are taxed at lower rates compared to regular earned income like wages and salaries.
Biden’s plan proposes a minimum tax rate of 25% for households with a net worth over $100 million. To put this into perspective, the wealthiest Americans currently pay an average tax rate of just 8.2%.
This proposed change is designed to ensure that the super-wealthy contribute a fairer share of their income to taxes.
Budget Targets 1031 Like-Kind Exchange Loophole
In a bold move, President Biden’s proposed FY 2025 budget aims to close the so-called “like-kind exchange” loophole, a popular tax strategy among real estate investors. Currently, the 1031-like-kind exchange rules allow investors to defer paying taxes on gains from real estate transactions as long as they reinvest the proceeds into similar properties. This means investors can continue to grow their portfolios without immediate tax burdens.
The White House argues that this setup essentially offers an “indefinite interest-free loan” from the government, claiming that real estate is uniquely favored by this tax break. With this change, Biden’s budget seeks to level the playing field and address what some see as an unfair advantage.
Kamala Harris’s Stand on Capital Gains Taxes
As of now, there aren’t specific details about her own proposals, but we do know she has backed the Biden administration’s plan in the past. During her previous presidential run, Harris supported raising taxes on capital gains and dividends.
Recently, her 2024 campaign has hinted at supporting an increase in the corporate tax rate, possibly up to 28%. This aligns with the broader Democratic Party platform, which highlights concerns over major companies avoiding federal income taxes despite substantial profits.
Keep an eye out for updates as we get closer to the election.
Bottom Line
President Biden’s proposed tax changes, including a nearly doubled capital gains tax rate and higher Medicare taxes, aim to address income inequality and boost federal revenue. While these proposals could significantly impact high earners and investors, their future depends on Congressional approval. Similarly, Vice President Kamala Harris’s potential stances on these issues remain to be fully detailed.
As we move towards the 2024 election, staying informed on these developments is crucial. Be sure to keep an eye on how these proposals evolve and how they might affect your finances in the coming months.
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