President Joe Biden has presented a proposed budget for FY 2025, totaling $7.3 trillion. To finance this budget, the president is suggesting significant tax increases, with a main focus on higher income taxpayers. One of the notable proposals is the reformulation of capital gain taxes. Currently, long-term capital gains are taxed at lower rates compared to ordinary income. The rates vary depending on income levels, with the top rate capped at 20%. However, with additional net investment income tax, the total rate can be as high as 23.8%.
Under Biden’s budget proposal, high-income taxpayers making over $1 million a year could see their long-term capital gains tax almost double to 39.6% or possibly even higher. When combined with the net investment income tax, some investors may end up paying as much as 44.6% in capital gains tax. This proposal has drawn attention as it could significantly impact wealthy investors. Additionally, state taxes play a role in the total tax rate, with some states potentially seeing rates over 50% under this plan.
The president’s budget also includes other tax increase proposals. One example is the plan to raise the top federal rate on ordinary income from 37% to 39.6%. This rate increase would only apply to taxpayers earning $400,000 or more annually. Furthermore, Biden is suggesting an increase in the Medicare tax rate from 3.8% to 5% for individuals earning over $400,000 a year. These tax changes are aimed at funding healthcare initiatives and supporting the Medicare program.
Another significant change proposed by President Biden is the repeal of Section 1031 exchanges, which allow for the deferral of capital gains tax when swapping real estate properties. This provision has been a key tool for the real estate industry, but the Biden administration argues it amounts to an interest-free loan from the government. Repealing this code section would have substantial implications for real estate investors and businesses that rely on like-kind exchanges.
In addition to the capital gain tax and ordinary income rate increases, Biden has proposed other tax hikes, including a minimum tax on billionaires. This wealth tax would also apply to individuals with a net worth over $100 million, not just billionaires. The minimum tax rate for households falling into this category would be 25%. This proposal has sparked debates about the fairness of taxing wealth rather than just income. Overall, the president’s tax increase proposals aim to generate revenue to fund various government programs and initiatives outlined in the FY 2025 budget.
