President Biden has talked a lot about raising taxes on wealthier Americans over the past two years. Now, it seems, we're one step closer to seeing that happen. On Thursday, Bloomberg News and The New York Times reported that the president will include a proposal to increase the capital gains tax for people earning $1 million or more in his American Families Plan, which is expected to be released in the coming days.
This is something Biden called for during last year's presidential campaign, so it's no surprise that he supports a capital gains tax adjustment. However, the recent news is the most concrete indication yet that he wants to move forward with the idea at this time. Investors were a bit spooked by the news, which contributed to stock market losses on Thursday.
Biden's Capital Gains Tax Increase
Under current law, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is saved for wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600.
Although details haven't been released yet, the president has previously stated that he wants anyone making more than $1 million per year to pay a 39.6% tax on long-term capital gains. That's nearly twice as much as the current rate.
Essentially, the idea is for millionaires to pay the same tax on long-term capital gains that they would pay on ordinary income, such as wages. Right now, the top tax rate on ordinary income is 37%, but Biden has also said on numerous occasions that he wants to boost that rate to 39.6%, which is the same top rate that applied before former President Trump's 2017 tax reform act.
Surtax on Net Investment Income
Don't forget about the 3.8% surtax on net investment income (e.g., taxable interest, dividends, gains, passive rents, annuities, and royalties). This extra tax hits single taxpayers with a modified adjusted gross income over $200,000 and joint filers with a modified AGI over $250,000. Biden hasn't suggested doing away with or otherwise modifying this extra tax, which means millionaires could see the overall tax rate on capital gains soar to 43.4%.
Will Congress Pass a Capital Gains Tax Hike?
Getting a capital gains tax increase through Congress and onto the president's desk won't be easy. Republicans will oppose it, and there will most likely be some Democrats that aren't thrilled with the idea, either. Raising taxes on individuals in general will be more difficult than increasing taxes on corporations, too.
The president's American Families Plan is likely going to include other "tax the rich" provisions, so there will be a lot of back-and-forth in Congress to find the right mix of tax hikes on the wealthy to pay for the expected benefits and tax breaks for middle- and lower-income Americans. Whether a capital gains rate change can ultimately make it into the final bill remains to be seen.
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