Politics

Biden Calls for Capital Gains Tax Hike

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

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.

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.

Most Popular

What Are the Income Tax Brackets for 2022 vs. 2021?
tax brackets

What Are the Income Tax Brackets for 2022 vs. 2021?

Depending on your taxable income, you can end up in one of seven different federal income tax brackets – each with its own marginal tax rate.
September 20, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
19 Best Stocks to Buy Now for High Upside Potential
stocks

19 Best Stocks to Buy Now for High Upside Potential

Finding the best stocks to buy when the market is selling off can be daunting, but the pros believe these 19 top-rated names are poised for big return…
September 23, 2022

Recommended

Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
September 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
September 23, 2022
Who leads in which states before election day?
Economic Forecasts

Who leads in which states before election day?

In a tight race, these state elections may make the difference when midterm results are announced in November.
September 22, 2022
Capital Gains Tax 101: Basic Rules Investors and Others Need to Know
capital gains tax

Capital Gains Tax 101: Basic Rules Investors and Others Need to Know

Learn the ins and outs of the capital gains tax, which you may owe if you sell stocks, your home, cryptocurrency, a stamp collection, and much more.
September 22, 2022