At this point, higher taxes are more a question of when than if.
Tax increases for the wealthiest Americans were a central part of President Joe Biden’s campaign, and his recent proposals call on Congress to enact such tax hikes. (Not to mention some members of Congress have their own plans for raising individual income taxes.)
Most of the tax increases proposed by Biden or Congress so far this year are simply efforts to make good on campaign promises to tax the wealthy and corporations — but not all of them are.
Following is a look at the groups that should brace for possible, if not probable, tax increases under Biden.
1. Many real estate investors
The American Families Plan proposal that Biden unveiled on April 28 calls for ending “the special real estate tax break — that allows real estate investors to defer taxation when they exchange property — for gains greater than $500,000.”
This tax break applies to what’s known as a like-kind exchange or a “1031” exchange, the latter of which refers to a section of the federal tax code created in 1921 to stimulate economic growth. Bloomberg reports:
“[T]he perk allows property investors to roll the proceeds of real estate sales into future purchases without paying capital gains taxes on profits. This deferral process can theoretically continue indefinitely until the investor’s death, and if assets are passed to an heir, the capital gains tax bill is often wiped out.”
Individual real estate investors, such as those who own rental property, benefit from this tax break to a much greater extent than corporations do, Bloomberg reports, citing federal statistics. But the smallest of real estate investors would be shielded from Biden’s proposal, as it would allow the tax break to continue for proceeds of less than $500,000.
2. People earning more than $400,000
Folks earning more than $400,000 per year should brace for higher payroll taxes, also known as FICA taxes. These include the Medicare and Social Security taxes that are withheld from employee’s paychecks to help fund those two federal programs.
Biden’s American Families Plan proposal calls for more consistent application of the higher Medicare FICA tax rate for people earning more than $400,000, which is 3.8% rather than the 2.9% rate that many employees with lower incomes pay. The last paragraph of the proposal states:
“Finally, high-income workers and investors generally pay a 3.8 percent Medicare tax on their earnings, but the application is inconsistent across taxpayers due to holes in the law. The President’s tax reform would apply the taxes consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.”
This doesn’t necessarily mean higher Social Security FICA taxes are out of the question for these folks, though.
Biden’s official presidential campaign platform called for “putting Social Security on a long-term path to solvency by raising payroll taxes for workers with more than $400,000 in earnings.” (Currently, there is an earnings cap on Social Security FICA taxes, which is $142,800 for 2021. That means workers who earn more than $142,800 do not pay Social Security FICA taxes on all of their income like folks with lower incomes do.)
3. Individuals in the highest income tax bracket
The Tax Cuts and Jobs Act of 2017 temporarily lowered the tax rate for individuals in the highest income tax bracket from 39.6% to 37%. Biden’s American Families Plan proposal calls for restoring it to 39.6%.
As of the 2021 tax year, the top individual tax rate applies to people whose taxable income is more than:
- $523,600 if their tax-filing status is single or head of household
- $628,300 if their tax-filing status is married filing jointly or surviving spouse
4. Millionaires with capital gains
Increasing the capital gains tax rate for individuals earning more than $1 million is part of the American Families Plan proposal as well. Specifically, such investors would pay the same tax rate on capital gains as they pay on ordinary income.
Capital gains are earnings from the sale of capital assets like stocks, bonds and real estate. They are taxed at different rates than ordinary income like wages.
Currently, the highest tax rate for net capital gains is 15% for most individuals, but it can push up to 20% or even 28% in some situations. The highest ordinary income tax rate is 37%, although it would rise to 39.6% under Biden’s American Families Plan proposal.
5. People who inherit more than $1 million in capital
The American Families Plan proposal isn’t good news for all families. It calls for limiting what’s known as the “step-up in basis,” which applies to capital assets like stocks, bonds and real estate that are inherited. As the nonprofit Tax Foundation explains it:
“Step-up in basis reduces capital gains tax liability on property passed to an heir by excluding any appreciation in the property’s value that occurred during the decedent’s lifetime from taxation.”
Under Biden’s American Families Plan proposal, this tax break would be disallowed for inherited gains of more than $1 million per person.
That plan states that “without these changes” — referring to a higher capital gains tax rate for millionaires and a narrower step-up in basis — “billions in capital income would continue to escape taxation entirely.” But that is not entirely true: Folks often purchase capital assets — including stocks, bonds and homes — with after-tax income, meaning income on which they paid federal taxes around the time they purchased such assets.
That would partially undo a provision of the Tax Cuts and Jobs Act of 2017 that reduced the corporate tax rate from a maximum of 35% to a flat 21%.
7. Some gig workers
This is the only tax change in this article that already has happened. The American Rescue Plan Act of 2021, which Biden signed into law in March, requires online “gig economy” platforms — like Uber, DoorDash, Airbnb, Etsy and TaskRabbit — to report their payments to gig workers to the IRS if a worker earns at least $600. Previously, that threshold was $20,000.
Technically, this isn’t a tax increase because such gig workers generally should have been reporting all of their income to the IRS all along. But this change likely will have the same effect as a tax hike: more revenue for the federal government. Roll Call reports that it’s expected to generate an estimated $8.4 billion in extra tax revenue through the 2031 fiscal year.
8. Stock, bond and derivative investors
It’s not Biden’s proposal, but if the Wall Street Tax Act becomes law, it will have the effect of increasing individual income taxes on Biden’s watch. The bill, introduced in the House in January and the Senate in March, would create a 0.1% tax on every sale of stocks, bonds and derivatives.
Sen. Brian Schatz, D-Hawaii, who sponsored the Senate version of the bill, described it as an effort to discourage high-volume speculative trading, but it does not distinguish between types of traders. The extra 0.1% tax generally applies to any buyer or seller in the U.S.
9. ‘Ultra-millionaires’ and billionaires
According to Sen. Elizabeth Warren, D-Mass., who introduced the bill in the Senate, it would levy a:
- 2% annual tax on the net worth of households and trusts between $50 million and $1 billion
- 3% annual tax on the net worth of households and trusts of more than $1 billion
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