Biden Calls for Capital Gains Tax Hike

As expected, President Biden included a capital gains tax increase for millionaires in his American Families Plan.

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When President Biden addresses the nation tonight, he's going to lay out a massive plan designed to "investment in our kids, our families, and our economic future." This plan – called the American Families Plan – would provide paid family and medical leave, free pre-school and community college, tax breaks for low- and middle-income people, limits on child-care costs, scholarships for future teachers, and much more.

To help pay for his plan, the president wants to boost taxes on the wealthy. He's offering a number of ways to do this – including by raising the capital gains tax for people earning $1 million or more. Of course, there's no guarantee the proposed capital gains tax hike will ever materialize. The president's plan must be passed by Congress before he can sign it into law – and he'll have a fight on his hands to get that done. So, wealthy investors shouldn't panic quite yet…but you might want to start thinking about a future with higher capital gains rates now just in case.

Biden's Plan to Increase the Capital Gains Tax

Under current law, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is saved for wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600.

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However, under the president's American Families Plan, anyone making more than $1 million per year would have to pay a 39.6% tax on long-term capital gains. That's nearly twice as much as the current rate.

Essentially, the idea is for millionaires to pay the same tax on long-term capital gains that they would pay on ordinary income, such as wages. Right now, the top tax rate on ordinary income is 37%, but Biden also wants to boost that rate to 39.6%, which is the same top rate that applied before former President Trump's 2017 tax reform act.

Surtax on Net Investment Income

Don't forget about the 3.8% surtax on net investment income (e.g., taxable interest, dividends, gains, passive rents, annuities, and royalties). This extra tax hits single taxpayers with a modified adjusted gross income over $200,000 and joint filers with a modified AGI over $250,000. Biden hasn't suggested doing away with or otherwise modifying this extra tax, which means millionaires could see the overall tax rate on capital gains soar to 43.4%.

Will Congress Pass a Capital Gains Tax Hike?

Getting a capital gains tax increase through Congress and onto the president's desk won't be easy. Republicans will oppose it, and there will most likely be some Democrats that aren't thrilled with the idea, either. Perhaps a smaller capital gains tax rate increase will pass – say, with a top rate of 25% to 30%, instead of 39.6%. Raising taxes on individuals in general will be more difficult than increasing taxes on corporations, too.

The president's American Families Plan includes other "tax the rich" provisions, so there will be a lot of back-and-forth in Congress to find the right mix of tax hikes on the wealthy to pay for the proposed benefits and tax breaks for middle- and lower-income Americans. Whether a capital gains rate change can ultimately make it into the final bill remains to be seen.

Rocky Mengle
Senior Tax Editor, Kiplinger.com

Rocky was a Senior Tax Editor for Kiplinger from October 2018 to January 2023. He has more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.