President Joe Biden has proposed a $7.3 trillion budget for FY 2025 that includes a number of tax increase proposals. The focus is on getting higher income taxpayers to pay more, with capital gain taxes being a major point of discussion. Currently, long-term capital gains are taxed at lower rates than ordinary income, with a maximum rate of 20%. However, Biden is proposing to nearly double the long-term capital gains tax for high-income taxpayers, potentially increasing it to 39.6% for those earning over $1 million a year. There is even the possibility for this rate to go as high as 44.6%, although the enactment of this change remains uncertain.
In addition to the federal tax increases, state taxes will also play a role in how much individuals end up paying. The Biden plan could lead to some taxpayers facing over 50% in capital gain taxes when combining federal and state rates. There are 11 states where taxpayers could potentially pay at least 50% capital gains tax under this plan. This would significantly impact individuals in states like California, New York, and New Jersey, where the combined rates could exceed 55%.
Aside from capital gains taxes, President Biden is also proposing other tax increases. The top federal rate on ordinary income may increase from 37% to 39.6%, with this new rate applying to taxpayers making $400,000 or more. Additionally, Biden is looking to increase the Medicare tax rate from 3.8% to 5% for individuals making over $400,000 a year. This increase in taxes is aimed at financing Medicare and other social programs.
Another significant change proposed by President Biden is the repeal of Section 1031, which allows for tax-deferred exchanges of like-kind properties, primarily real estate. This provision has been utilized by the real estate industry for generations but would be eliminated under Biden’s FY 2025 budget. The White House has argued that this provision amounts to an interest-free loan from the government and should be removed.
Furthermore, President Biden has proposed imposing a minimum tax on billionaires and wealthy individuals with a net worth exceeding $100 million. This minimum tax would be at least 25% and is seen as a form of wealth tax rather than a traditional income tax. While controversial, this proposal is part of Biden’s efforts to increase taxes on the wealthy to support social programs and initiatives outlined in his budget. These tax increases, if enacted, could have a significant impact on high-income individuals and investors in the coming years.
