President Biden’s latest budget proposal for fiscal year 2025 is making big waves. At a whopping $7.3 trillion, his plan not only targets wealthy individuals with a new minimum tax on billionaires and a nearly doubled capital gains tax rate but also looks to raise the Medicare tax rate. If that’s not enough, the budget promises significant tax relief for lower and middle-income earners, including new homebuyer tax credits.
The White House claims that these changes could cut the deficit by almost $3 trillion over the next decade. With Vice President Kamala Harris now the Democratic nominee for the 2024 presidential election, many are wondering if she might push for even tougher measures on capital gains taxes.
Read the full blog as we explore the potential impacts and details of these proposed tax changes. Don’t miss out—let’s uncover what’s on the horizon together.
How Biden’s Budget Plan Will Nearly Double Capital Gains Tax Rate
If you’ve been following the latest updates on tax policies, you know that the capital gains tax rate for long-term investments—those held for over a year—currently caps out at 20%. This tax is applied to the profits you make when you sell or trade an asset, and the rate depends on what kind of asset it is, how much you earn, and how long you’ve owned it.
President Biden’s proposed budget for fiscal year 2025 aims to shake things up by nearly doubling this rate to 39.6%. This increase would specifically impact high earners—those making at least one million dollars a year.
What’s Behind the 44.6% Capital Gains Tax Proposal?
You might have stumbled upon a mention of a 44.6% capital gains tax rate in the budget details. This proposal is separate from the main budget plan and targets high earners with significant net investment and taxable income. Specifically, it suggests raising the net investment income tax rate by 5% for those making over $400,000, paired with an increased top ordinary income rate of 39.6%.
Biden’s Plan to Close the Carried Interest Loophole
Another key aspect of Biden’s budget is the renewed focus on the “carried interest loophole.” Right now, some asset managers can classify their earnings as capital gains, which are taxed at a lower rate than ordinary wages. Biden’s proposal aims to close this loophole by taxing that income as ordinary wages, which would increase the tax rate on these earnings and ensure they are taxed fairly.
Ending the Stepped-Up Basis for Inherited Assets
President Biden’s budget plan also tackles the “stepped-up” basis rule, a strategy that has been used to reduce capital gains taxes on inherited assets, targeting gains over $5 million per person and $10 million per couple. This rule currently allows the value of inherited assets to be adjusted to their market value at the time of the owner’s death, which reduces the amount of capital gains tax owed.
Under existing tax laws, these gains can be passed down through generations without being taxed, a benefit that critics argue primarily helps the wealthy and contributes to inequality.
Biden’s proposal aims to eliminate this tax break for gains exceeding $5 million per person and $10 million per married couple. The administration argues that this change will address growing inequality by ensuring that these substantial gains are taxed unless the property is donated to charity.
Importantly, the plan includes protections to prevent family-owned businesses and farms from being taxed if they are passed on to heirs who continue to run them.
Latest Plan to Raise Medicare Tax Rate
President Biden’s proposed budget for FY 2025 includes a plan to increase the Medicare tax rate for those earning over $400,000 a year. This new tax would apply to both wages and capital gains. Right now, the Medicare tax rate on income above this threshold stands at 3.8%, but the proposal suggests raising it to 5%.
This change aims to strengthen the Medicare program, which currently serves over 60 million people, mostly those over 65. With Medicare’s user base expected to grow, there are worries about the program’s long-term sustainability.
The White House believes that this tax increase could extend the Medicare Trust Fund’s life by at least 25 years, without cutting benefits. The revenue would be directed to the Trust Fund, just as originally intended.
However, due to current Congressional divides and the upcoming election, this proposal might not take effect immediately.
Income Tax Rate Increase: What It Means for High Earners
In a series of proposals, Biden is also shaking things up with his latest budget proposal, aiming to boost the top income tax rate for high earners.
Under his plan, individuals making $400,000 or more would face a top rate of 39.6%, up from the current 37%. This change would undo some of the “Trump tax cuts” from the Tax Cuts and Jobs Act (TCJA).
However, keep in mind that this proposal is still just that—a proposal. With the current political climate, it’s uncertain if it will gain the necessary support in Congress this year.
For now, you’ll continue to see the seven tax rates you’re familiar with: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates will still apply, and the tax brackets will be adjusted for inflation as usual.
New Minimum Tax on Billionaires: What It Means for the Wealthy
President Biden’s new budget includes a significant change: a minimum tax on billionaires. This “wealth tax” aims to address a major issue where the super-rich can avoid paying taxes on a large portion of their income. Often, the wealthy build their fortunes through investments, which are taxed at lower rates compared to regular wages and salaries that most of us rely on.
Under Biden’s proposal, households with a net worth over $100 million would face a minimum tax rate of 25%. This is a sharp contrast to the average 8.2% tax rate currently paid by the richest Americans. The goal here is to ensure that the wealthiest individuals contribute a fairer share to the tax system.
Bottom Line
While these changes could reshape the tax landscape, their future depends on Congressional support and political negotiations. As we await further developments, staying informed about these potential tax reforms is crucial. Keep following for updates and insights into how these changes might affect you and your financial planning.
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