President Biden’s $7.3 trillion FY 2025 budget, proposes several tax changes aimed at wealthier taxpayers, including a minimum tax on billionaires, a near doubling of the capital gains tax rate, and an increased Medicare tax rate.
This budget proposal comes as the IRS says it has recently collected (through ramped-up enforcement) more than $500 million in unpaid taxes from delinquent millionaires and "wealthy tax cheats."
The White House says the President's budget, which also contains several tax breaks for those with lower and middle incomes, including new homebuyer tax credits, would reduce deficits by nearly $3 trillion over ten years.
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Here is more of what you need to know.
Biden capital gains tax increase
The capital gains tax rate for long-term capital gains, assets held for more than one year, is at most 20%. Capital gains are the profits you make from selling or trading an asset. The tax rates that apply to a particular capital gain (i.e., capital gains tax rates) depend on the type of asset involved, your taxable income, and how long you held the property before it was sold.
Biden’s FY25 budget proposal would nearly double that capital gains tax rate to 39.6%. That proposed capital gains rate increase would apply to investors who make at least one million dollars a year.
44.6% capital gains proposal?
You may have heard about a proposed 44.6% capital gains rate in a budget footnote. That rate is a separate proposal that if ever approved, would apply only to those with high net investment and taxable income.
The rate supposes an increase of the net investment income tax rate to 5% above the $400,000 threshold with an increased top ordinary rate of 39.6%.
'Carried interest loophole'
The Biden budget proposal also revives the debate over the so-called carried interest loophole. Currently, asset managers can treat certain compensation they receive as capital gains, meaning a significant portion of their income is taxed much lower than if treated as wages.
Under Biden’s budget proposal, that compensation would be treated as ordinary income for federal income tax purposes to end the loophole.
Biden budget stepped-up basis
Additionally, the Biden budget proposes to eliminate the practice of “stepping up” the basis for gains exceeding $5 million per person and $10 million per married couple.
- A stepped-up basis involves raising the cost basis in appreciated inherited assets to the fair market value at the time of the decedent’s death.
- Since cost basis helps determine tax amount, stepping up the basis minimizes the capital gains taxes owed.
Under current tax law, these accumulated gains can generally be passed down across generations untaxed. The Biden administration says this exacerbates inequality since the practice tends to benefit the wealthy.
If adopted, these gains would be taxed if the property is not donated to charity. Additionally, the administration says the change would be designed so that family-owned businesses and farms are not taxed when giving to heirs who continue running the business.
Medicare tax rate
President Biden is proposing a tax increase for people making more than $400,000 a year to help shore up the Medicare program. That income threshold would be based on wages, salary, and capital gains.
The FY25 Biden budget proposes to increase the Medicare tax rate on earned and unearned income above $400,000 from 3.8% to 5%.
Related: Medicare Tax: Five Things Every Worker Needs to Know
- According to federal data, more than 60 million people use Medicare, which generally provides health insurance for people over 65.
- The number of people using Medicare is expected to grow, which has caused concern over the long-term viability of Medicare and other programs like Social Security.
The White House says that this tax increase would extend the life of the Medicare Trust Fund by at least 25 years, without cutting benefits. The goal, the administration notes, would be to "dedicate the revenue from the Medicare net investment income tax to the Trust Fund, as originally intended."
However, like the capital gains tax proposal, the Medicare tax rate increase will not come to fruition this year, given Congressional divides and the upcoming election.
Income tax rate
President Biden wants to increase the top income tax rate for wealthier taxpayers.
- Under Biden’s budget proposal, taxpayers making $400,000 would be taxed at a top rate of 39.6%.
- The current top tax rate, tied to inflation-adjusted tax brackets, is 37%.
- The proposed tax rate change would reverse the "Trump tax cuts" in the Tax Cuts and Jobs Act (TCJA).
Note: The Biden budget is merely a proposal that given the state of play on the Hill is not likely to gain Congressional support to pass this year. So, the seven tax rates you are familiar with i.e., 10%, 12%, 22%, 24%, 32%, 35%, and 37%, apply. (The income tax brackets associated with those rates are adjusted yearly for inflation.)
Biden budget tax increase for billionaires
President Biden also wants to impose a minimum tax on billionaires. Some of the rationale behind this “wealth tax” is that wealthier taxpayers are often able to shield a good portion of their income from tax.
That’s partly because the wealthy usually grow their wealth through investments, which are taxed at lower rates than earned income. Earned income (which includes wages and salaries) is typically the main source of money for taxpayers with lower and middle incomes.
- The billionaire tax in Biden’s budget proposal would be at least 25% for households with net worth exceeding $100 million.
- For comparison, according to the White House, the wealthiest taxpayers in the United States reportedly pay an average 8.2% tax rate.
Capital gains taxes on real estate: 1031 like-kind exchanges
Biden's FY25 budget would also close what the administration calls the “like-kind exchange” loophole. Under current 1031 like-kind exchange rules, real estate investors can defer paying tax on gains from certain real estate deals as they keep investing (reinvesting the proceeds) in that real estate.
The White House says "this amounts to an indefinite interest-free loan from the government," and that "real estate is the only asset that gets this sweetheart deal."
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