While there is no sign of special retirement planning in the materials shared so far, the tax plan released by President Joe Biden on April 28 would impose substantial tax increases on high-income individuals to pay for his $ 1.8 trillion plan for American families .
The tax reform plan, detailed in a fact sheet released prior to his April 28 speech to a joint congressional session, includes proposals to abolish preferential tax treatment on capital income for those who earn more than $ 1 million a year, as well to increase the top individual tax rate.
“The president’s tax agenda will not only reverse the biggest tax giveaways for 2017, it will also reform tax law so that the rich will have to play by the same rules as everyone else,” says the White House, characterizing the tax changes as a way of doing reward work and not wealth.
Increase the top tax rate
In a reversal of the law on tax cuts and employment, the proposal provides for the reintroduction of the highest individual income tax rate from the current 37% to 39.6%. The White House argues that this change would only apply to the top 1% of taxpayers. The proposal doesn’t specify what the new income thresholds would be, but President Biden previously insisted that his tax changes would not affect those with incomes below $ 400,000 a year.
Tax treatment of capital gains
On the grounds that the current capital gains tax rate of 23.8% – the marginal tax rate of 20% plus a 3.8% levy for President Obama’s Medicare expansion – is less than what many have in the middle – Families of the class pay on their wages. The proposal would remove preferential tax treatment for capital income for higher income households and tax those gains in the same way as normal income. Households earning more than $ 1 million – or what the administration calls “the highest 0.3% percent” of all households – would pay the same rate of 39.6%, which is the rate, for their total income paid for returns on investments and wages. Adding the Obama tax levy would increase the capital gains tax for these taxpayers from 23.8% to 43.4%. In much of the country, the addition of state and local taxes would bring this new maximum rate to over 50%.
Inheritance taxes
To ensure that so-called high earners’ wealth does not escape taxation when passed on to heirs, the proposal would encourage the practice of a reinforced base for certain gains in excess of $ 1 million ($ 2.5 million per couple combined with ) eliminate existing real estate exceptions). It also aims to ensure that profits are taxed when the property is not donated to charity. While providing details, the White House notes that these reforms are “built with safeguards” so that family businesses and farms do not have to pay taxes if passed on to heirs who continue to run the business.
Transferred interest
By aligning the treatment of capital gains and ordinary income, the plan would also remove the void in carried-over interest so that private equity managers and hedge fund partners pay taxes at ordinary income rates rather than a lower capital gains tax rate. The White House also urges Congress to go a step further by specifically addressing the preferential tax treatment of interest income and clarifying that such gains should be taxed at normal income rates.
Additional tax increases
In a seeming reference to like-for-like exchanges, the proposal would also end what is known as a special property tax break, which allows property investors to defer taxation on property exchanges for profits in excess of $ 500,000.
President Biden would also permanently extend the current restriction that curbs large, excessive business losses, with 80% of the benefits going to those who earn more than $ 1 million, according to the fact sheet.
As noted above, high-income workers and investors generally pay a Medicare tax of 3.8% on their income. However, the White House contends that the application is inconsistent due to “legal loopholes” between taxpayers. The proposal aims to apply taxes consistently to those who earn more than $ 400,000 to ensure that “all high-income Americans pay the same Medicare taxes.”
Reporting and enforcement of information
Citing the need to ensure that taxpayers pay the taxes they owe, the White House makes two proposals. The first would require financial institutions to report information on account flows so that income from investments and business operations are subject to stronger reporting, such as wage income.
The second would increase the IRS’s enforcement budget by $ 80 billion over the next decade to help ensure tax compliance. Additional resources would be focused on large corporations, corporations, land, and higher income individuals, where the White House believes the most sub-reports and violations are currently in place. The IRS would also be empowered to regulate paid accountants under the proposal.
Overall, the White House estimates that tax reforms that focus on those with higher incomes would bring in about $ 1.5 trillion over 10 years. This would help balance the American family plan, which reportedly includes $ 1.8 trillion in investments and tax credits for families and children over 10 years old.
What’s next?
While the proposals could have significant ramifications for M&A deals and asset managers if they go into effect, the proposal does not include specific tax increases that affect retirement savings.
Also note that these tax increases are separate from the corporate tax reforms the White House implemented to offset the American employment plan, which is the administration’s separate infrastructure and employment package valued at nearly $ 2 trillion becomes. Among the various changes in this package is the increase in the corporate tax rate to 28%.
Of course, this is only the first step in a long process. The Biden government proposal has yet to go through Congress, and Members of the House and Senate have their own priorities that they want to address. Rep. Richard Neal (D-MA), chairman of the House Ways and Means Committee, has already released his own family support proposal, but it did not provide details of any tax changes he may be considering. Similarly, Senate Finance Committee Chairman Ron Wyden (D-OR) may want some of his own priorities to be addressed.
Additionally, members of both parties view some of the proposed tax increases in the Biden plan as non-starters. that will likely force changes, especially in the equally divided Senate.