Posted by Tiffany Gaskin

Biden's Proposal to Tax Long-Term Capital Gains is Unlikely to Affect You; This is What You Should Know.

Biden's Proposal to Tax Long-Term Capital Gains is Unlikely to Affect You; This is What You Should Know.

President Joe Biden presented his plan for American families in late April, one of three aspects of the Build Back Better program that guided the first 100 days of his presidency. Biden proposed to raise the long-term capital gains tax rate for wealthy people to pay for the American family plan.

If you're worried about how this might affect your taxes, the answer is, it probably won't. This is what you need to know.


Who would be affected by this proposal?

In Biden's proposal, only the wealthy who earn more than a million dollars a year would be subject to tax increases. But, according to Brian Deese, director of the National Economic Council, only 0.3% of Americans reported this amount on the 2018 tax return.

The long-term capital gains tax rate is 15% or 20%, depending on income level. Some individual taxpayers cannot even pay capital gains tax if their total taxable income falls below a certain threshold.

Biden's proposal would almost double the top tax rate, which would raise the tax rate at 39.6%. It also adds a Medicare income tax of 3.8%, bringing the total to 43.4% of long-term capital gains.

"High-income workers and investors typically pay a 3.8% health insurance fee for their income, but enforcement is inconsistent between taxpayers due to loopholes in the law," a White House bulletin reads. "The President's tax reform would systematically tax those who earn more than $400,000, ensuring that all high-income Americans pay the same Medicare taxes."

Long-term capital gains are defined as capital gains on investments held for more than one year. The tax only applies if the investor sells an asset. Unrealized gains or gains on assets that the investor still holds are not affected.

Short-term capital gains or capital gains on investments bought and sold within one year will be subject to ordinary income tax.


Which accounts would be affected by this change?

According to a UBS research note, raising taxes would not affect 75% of U.S. equity accounts, regardless of how much income they earn.

This is because they have invested in accounts that are not subject to the long-term capital gains tax rate, including 401(k) plans and other employer-sponsored retirement plans and individual retirement accounts (IRA).

While these accounts can be taxed upon retirement (Roth IRAs are a notable exception), the tax rate will be based on the normal tax rate, not the long-term capital gains tax rate.

The tax increase also does not affect donations, which are usually made by tax-exempt organizations, such as universities or foreign investors.

Accounts that would be affected by the new tax rate include taxable brokerage accounts. The UBS research note indicates that 25% of U.S. stock accounts are taxable brokerage accounts. But even so, most aren't making $1 million a year so that they won't be affected by the change anyway.


How likely is this change to take effect?

The Biden administration's proposal to almost double the maximum long-term capital gains rate is ambitious but not final. Instead, such proposals provide a framework, a wishlist, so to speak, that parliamentarians can use in drafting future legislation.

That being said, Biden's plan for the proposed long-term capital gains tax rate is unlikely to work as it is. The UBS research note, for example, predicts that lawmakers will compromise at a rate of 28% instead of 39.6%.

Congress must decide the next steps. There are two ways that congressional lawmakers can pass tax legislation:

• The first goes through what is called the "regular order." This is the traditional process, which focuses on committees. This would require bipartisan support, which includes a majority vote in the House and 60 votes in the Senate, to avoid obstruction. The Senate's current design is unlikely to pass, at least not without significant changes.

• The second path is budget reconciliation, which requires only a simple majority of votes in the House and Senate. However, even with this option, parliamentarians will likely have to make concessions. Some moderate Democrats disagree with the Biden administration's plan, as it stands, according to a Wall Street Journal article.


What else do I need to know?

The tax proposal impacts the long-term capital gains tax rate and the wealthy's higher marginal income tax rate. In 2017, the Tax Cuts and Jobs Act reduced the top income tax rate from 39.6% to 37%. The American Families Plan would restore this rate to 39.6%.

These tax proposals are designed to help pay for the American Family Plan, which includes, but is not limited to:

  • Assistance to colleges and universities serving minority groups.

  • Expand childcare allowances to make them more accessible to low- and middle-income families and more accessible in rural areas.

  • Extend and improve certain tax credits for the benefit of low and middle-income families.

  • Four more years of free education for children, including two years of free preschool and two years of free community college.

  • Investments to address teacher shortages, increase teacher diversity and improve teacher training and support.

  • Support paid initiatives for sick and family leave.

The total price of the initial plan is $1.8 trillion.


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Tiffany Gaskin
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