President Joe Biden speaks during a joint session of Congress at the U.S. Capitol in Washington on Wednesday, April 28, 2021.
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Taxes could soon increase for the rich.
President Joe Biden aims to fund expanded education, child care, paid vacations and other reforms by raising more tax revenue from Americans who earn more than $ 400,000 a year.
It would do this by raising the highest tax rates on income and capital gains, changing the taxation of wealthy estates, closing so-called tax loopholes, and focusing audits on the wealthy to prevent evasion. fiscal.
In total, the plan for American families would raise $ 1.5 trillion over a decade by taxing the highest incomes, according to the White House.
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“I think you should be able to become a billionaire or a millionaire,” Biden told Congress Wednesday night in a speech outlining his agenda. “But pay your fair share.”
Of course, the proposal faces headwinds in Congress. Passage is not guaranteed and parts of the plan may change.
A new maximum tax rate of 39.6%
Biden’s tax plan would raise the top tax rate to 39.6%.
It was the highest rate before the 2017 Tax Cuts and Jobs Act, which lowered it to 37% currently.
The 39.6% rate would apply to the richest 1% of Americans, according to the White House.
According to Garrett Watson, senior policy analyst at the Tax Foundation, households with incomes over about $ 540,000 are among the richest 1% of taxpayers.
However, the precise income thresholds at which the 39.6% rate would apply to single taxpayers and married co-owners are not clear.
They would likely correlate with the current peak rate of 37%, Watson said. This rate applies to incomes greater than $ 523,600 for single tax filers and $ 628,300 for married couples.
This aspect of Biden’s proposal would bring in around $ 110 billion over a decade, according to the Tax Foundation.
Biden is essentially speeding up a future change in the tax code – the highest income tax rate is already expected to drop to 39.6% after 2025, by language in the tax cuts and jobs law.
A doubling of the rate of surplus value
The American Families Plan would also change the way the wealthy pay investment return tax in two ways.
“In my opinion, these elements of the proposal would affect the wealthiest people the most,” said David Herzig, director of Ernst & Young’s private client services tax group.
On the one hand, 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 3.8% surcharge on Medicare, they would pay a maximum rate of 43.4%.)
This would be an increase from the current 20% (or 23.8% including the surtax on net investment income).
The policy applies to taxpayers with annual income over $ 1 million – the richest 0.3% – who sell stocks, bonds and other assets held in taxable accounts for gain.
The rich derive a much larger share of their annual income from investments compared to those with low incomes.
Investments represent 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 salaries) represent respectively lower shares.
By comparison, Americans who earn less than $ 50,000 a year get about 5% of their income from their investments. Salaries represent over 80%.
“It will make people think a little more when they decide to sell and reallocate to another opportunity because of this tax bite,” Watson said.
Capital gains on death
The plan also changes the way wealthy estates pay tax on assets appreciated on death – part two of Biden’s capital gains tax reform
Biden would get rid of the so-called “base increase” on death for any gain over $ 1 million.
Essentially, the appreciation of any unsold asset – also known as unrealized gains – would be subject to capital gains tax upon the death of the owner. (Again, that would be as high as 43.4% for the richest households).
This regime would be very different from the current law.
Currently, the appreciation of an asset is not imposed on death. The asset benefits from a base increase, which means that it is transferred to the heirs at its current market value, erasing the capital gain. The heirs could then sell the asset without capital gains tax.
(Single estates may owe a 40% federal estate tax on assets exceeding $ 11.7 million. The threshold is $ 23.4 million for married couples.)
“It’s not the property tax,” said Gordon Mermin, senior research associate at the Urban-Brookings Center for Tax Policy, of Biden’s proposal. “It’s just a matter of taxing those gains that have never been taxed.”
Wealthy estates could omit $ 1 million in tax gains on death. (It would be $ 2 million for couples.)
This exclusion would be in addition to the existing tax relief for valued real estate. (Single taxpayers can exclude up to $ 250,000 in capital gains from tax; that’s $ 500,000 for married couples.)
Let’s say a wealthy couple bought a $ 5 million house that was worth $ 10 million at the time of their death. The estate can exclude half of that $ 5 million from tax – and would pay tax on the remaining $ 2.5 million.
“The exclusion here is high enough that it really targets the top earners,” Watson said.
Family businesses and farms would also benefit from an exclusion – they would not have to pay tax when the business or farm is passed to heirs who continue 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 paid on unrealized gains be deducted from the size of the entire estate?)
“There are a lot of questions about how this might work,” Herzig said.
More IRS audits
The White House would also allocate additional resources to the IRS to improve tax audits of households with more than $ 400,000 in income.
Audit rates on those earning more than $ 1 million a year fell 80% between 2011 and 2018, according to IRS data cited by the White House, which says its enforcement plan would raise 700 billion dollars over a decade.