President Biden has proposed a massive $7.3 trillion budget for FY 2025, with a focus on tax increases for higher income taxpayers. One key proposal is to increase the top federal rate on ordinary income from 37% to 39.6%, which was the rate before the Tax Cuts and Jobs Act in 2017. This increased rate would apply to taxpayers making $400,000 or more. Additionally, the President is looking to hike the capital gain tax for high income taxpayers, potentially doubling the rate to 39.6% or even 44.6% for those making at least one million dollars a year.
Under current law, long term capital gains are taxed at lower rates depending on income levels. Biden’s proposal would increase the tax rate on long term capital gains for high income taxpayers to nearly double, potentially up to 39.6% or even 44.6%. This would impact investors making at least one million dollars a year. The President is also considering raising the Medicare tax rate from 3.8% to 5% for those earning over $400,000 annually.
Another significant change in Biden’s budget proposal is the repeal of Section 1031 exchanges, which allow for tax-deferred exchanges of real estate. This provision has long been utilized by the real estate industry for generations, but the White House argues that it amounts to an interest-free loan from the government. Additionally, the President is targeting carried interests, which allow fund managers to receive certain interests as long term capital gains. Biden’s proposal aims to treat these interests as ordinary income for federal income tax purposes.
In a controversial move, President Biden is also proposing a minimum tax on billionaires, which would be a type of wealth tax rather than a traditional income tax. Despite the name, this tax would apply to wealthy individuals with a net worth exceeding $100 million, not just billionaires. If passed, households with a net worth exceeding $100 million would face a minimum tax rate of 25%. The proposal has stirred debate due to its focus on wealth rather than traditional income.
Overall, President Biden’s budget proposal includes significant tax increases for higher income taxpayers, including hikes in the top federal rate on ordinary income, capital gains tax rates, and the Medicare tax rate. The proposed repeal of Section 1031 exchanges and treatment of carried interests as ordinary income mark additional changes to the tax system. The billionaire tax, which targets wealthy individuals with a net worth exceeding $100 million, adds another layer of controversy to the President’s tax plan. This budget proposal reflects Biden’s commitment to addressing income inequality and funding key government programs through tax reform.
