President Biden’s $7.3 trillion FY 2025 budget released March 11, 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.
'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, which means that a significant portion of their income is taxed at a much lower rate than if it were treated as wages.
Under Biden’s budget proposal, that compensation would be treated as ordinary income for federal income tax purposes to end the carried interest loophole.
Medicare tax
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.
Biden's FY25 budget proposes to increase the Medicare tax rate to 5% from the current 3.8%.
- According to federal data, more than 60 million people use Medicare, which provides health insurance for people over age 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. However, like the capital gains tax proposal, the Medicare tax rate increase is not likely to find enough support to pass 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 so-called Trump tax cuts in the Tax Cuts and Jobs Act.
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 a minimum of 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."
Related
- Biden Proposes New Homebuyer Tax Credits
- Should Billionaires Pay More Taxes? Biden Says Yes
- Types of Income the IRS Doesn't Tax
- Will a Controversial Capital Gains Tax Be Repealed in November?
FAQs
For the 2024 tax year, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or less. The rate jumps to 15 percent on capital gains, if their income is $47,026 to $518,900. Above that income level the rate climbs to 20 percent.
What is the Biden tax plan calls for 44.6% levy on investments? ›
Biden is proposing to increase the 3.8% Medicare tax to 5% for those earning at least $400,000 to shore up the program's trust fund. That would mean the richest taxpayers would pay a 44.6% federal rate on investment income and other earnings.
Can capital gains push me into a higher tax bracket? ›
Long-term capital gains can't push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you're seeing significant growth in your investments, you may want to consult a financial advisor.
Why is some income from capital taxed twice? ›
So if you're a shareholder or owner of a corporation, then you may face double taxation because your income will come from corporate earnings that were already taxed, and you will also pay taxes on them. The same happens to individual investors who pay taxes on dividends, which are a share of a corporation's earnings.
Is Biden trying to raise capital gains tax? ›
The administration released its 2025 budget proposal last month, and the budget calls for a significant increase to the top capital gains tax rate, bringing it to 44.6 percent from 20 percent.
At what age do you not pay capital gains? ›
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
What's in Biden's new tax plan? ›
Going forward, in addition to honoring his pledge not to raise taxes on anyone earning less than $400,000 annually, President Biden's tax plan would cut taxes for middle- and low-income Americans by $765 billion over 10 years. The President's Budget: Increases the Child Tax Credit for 66 Million Children.
What is the current capital gains tax? ›
Capital gains can be subject to either short-term tax rates or long-term tax rates. Short-term capital gains are taxed according to ordinary income tax brackets, which range from 10% to 37%. Long-term capital gains are taxed at 0%, 15%, or 20%.
What is the carried interest loophole? ›
Carried interest, income flowing to the general partner of a private investment fund, often is treated as capital gains for the purposes of taxation. Some view this tax preference as an unfair, market-distorting loophole.
Do capital gains affect Social Security taxation? ›
It's important to note that while capital gains can increase one's adjusted gross income (AGI), they are not subject to Social Security taxes. However, a higher AGI from capital gains can potentially lead to a higher portion of Social Security benefits being taxable.
Here are four of the key strategies.
- Hold onto taxable assets for the long term. ...
- Make investments within tax-deferred retirement plans. ...
- Utilize tax-loss harvesting. ...
- Donate appreciated investments to charity.
Gains from the sale of assets you've held for longer than a year are known as long-term capital gains, and they are typically taxed at lower rates than short-term gains and ordinary income, from 0% to 20%, depending on your taxable income.
What is the disadvantage of double taxation? ›
International businesses are often faced with issues of double taxation. Income may be taxed in the country where it is earned, and then taxed again when it is repatriated in the business' home country. In some cases, the total tax rate is so high, it makes international business too expensive to pursue.
Do long-term capital gains get taxed twice? ›
The taxation of capital gains places a double tax on corporate income. Before shareholders face taxes, the business first faces the corporate income tax.
How to avoid double taxation? ›
How to Avoid Double Taxation
- Retaining corporate earnings. You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. ...
- Pay salaries instead of dividends. You can distribute profit as salaries or bonuses instead of as dividends. ...
- Split income.
Beginning in 2026, the starting points for the 15 percent and 20 percent rates for capital gains and qualified dividends will match the starting points for tax brackets applicable to ordinary income, as under pre-2018 law.
What are the IRS changes for 2024? ›
For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023; and for heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023.
What are the tax rates for 2024? ›
State Individual Income Tax Rates and Brackets, as of January 1, 2024
| State | Single Filer Rates | Married Filing Jointly Rates |
|---|
| California | 13.30% | 13.30% |
| Colorado (a, o) | 4.40% | 4.40% |
| Connecticut ((i, p, q, r) | 2.00% | 2.00% |
| Connecticut | 4.50% | 4.50% |
41 more rowsFeb 20, 2024
Key provisions in the Tax Relief for American Families and Workers Act of 2024. The bill provides for increases in the child tax credit, delays the requirement to deduct research and experimentation expenditures over a five-year period, extends 100% bonus depreciation through 2025, and increases the Code Sec.
