This week the Department of Treasury released Biden’s Fiscal Budget for 2025. In the budget was a series of tax increases aimed at entrepreneurs and wealthy taxpayers. It covers Capital Gains tax, Medicare Tax, Billionaire Tax, Corporate Tax and the most controversial is an unrealized capital gains tax.
Stay Informed
Even though these new tax increases may not see the light of day, it’s important for you to know what the President is proposing so you can stay informed in case Congress does decide to adopt any of these changes. Here are the tax changes that are on the table
- Capital Gains Tax Increase
- Medicare Tax Increase
- Corporate Tax Change
- Billionaire Tax Increase
- Unrealized Gains
Capital Gains Tax
Capital Gains is a tax you pay when you sell an asset. Things subject to Capital Gains are stocks, real estate, cryptocurrency, artwork and collectibles.
Currently, the Capital Gains tax rate on assets you hold for over 1 year (which is called long term capital gains) is 20%. The President wants to raise that amount to 39.6% for people that make over a $1 million dollars. In my opinion, it will mostly affect people who are selling businesses, and tech people that are exiting their start-ups.
The other thing you must be aware of is if your adjusted gross income (AGI) is over $200K ($250K if you’re married) you pay an extra 3.8% Obamacare tax called the Net Investment Income Tax.
In other words, if you’re too successful your capital gains tax is 23.8%.
Increase in Obamacare Tax
As mentioned earlier, the Obamacare tax is 3.8% for people whose AGI is over $200K ($250K if you’re married).
Biden is proposing to change that to 5% and increase the threshold level to $400,000. That would make the Capital Gain Tax Rate for people making over $1,000,000 be 44.6% (39.6% + 5%).
And remember, if you live in a state with a high state tax, like California or New York, you will have to pay the state tax on top of these income taxes. So, your tax may be as high as 57.90% (44.6% + California 13.30%). If you live in a high tax state, be weary.
Corporate Tax Rate for C Corporations
Part of Trumps Tax Cut and Job Act (TCJA), the Corporate Tax Rate went from 35% down to 21%. Biden’s proposal would increase the tax rate back up to 28%.
An additional proposal is to double the tax on Foreign Earnings. Currently if you have income from foreign earnings, your tax is 10.5% and this proposal doubles it to 21%.
The Buffet Rule – Billionaire’s Tax
Back in 2011, Warrant Buffett famously gained attention when he pointed out the tax inequality between him and his secretary. He mentioned that his secretary paid a higher that rate than himself because all her income was taxed as ordinary income, and that his income was taxed as capital gains.
10 years later, during the 2012 state of the Union, President Obama suggest the “Buffet Rule” that would mean if you had a certain amount of wealth, there should be a minimum tax rate you should pay.
Biden’s proposal is to make the Buffet Rule law. Specifically, if your net worth is over $100 million, the minimum tax you must pay on your income is at least 25%.
This is on the heels of a recent poll conducted by Bloomberg News & Morning Consult. The poll was conducted in 7 swing states, and it showed that 77% of Registered Voters like the idea of a Billionaires Tax to help prop up Social Security rather than raise the retirement age by 2 years, increasing payroll taxes, or using a new formula to calculate social security benefits.
Unrealized Capital Gains Tax – Inheritance Tax
There is a lot of frustration on Twitter over the Unrealized Gains Tax. Most people are talking about it as if the tax is on your assets while you’re alive, but the unrealized gains tax is proposed on the Fair Market Value of Assets when someone passes.
So, this is more of an inheritance tax than an unrealized gains tax. The Biden Administration has said that this would be for wealthier families, however they didn’t give any clear information as to what the threshold of family wealth would be for this unrealized gains / inheritance tax would be.
Conclusion
I don’t think many of these will pass, especially the tax on unrealized capital gains / inheritance tax. I’m hopeful that this may just be posturing to appease the president’s base during an election year since he knows he doesn’t have the votes in Congress to pass this budget.
As always, I’ll keep you up to date with any changes or new information as it becomes available.