Real estate capital gains tax is better for the super rich than the Biden plan
NICOLAS KAMM | AFP | Getty Images
The uber-rich can applaud the House Democrats’ proposed investment income tax reforms over the Biden administration’s previous plan.
The White House has called for a maximum federal tax rate of 39.6% on capital gains and long-term dividends, almost double the current 20%.
Long-term capital gains tax applies to assets such as stocks and houses that have increased in value and whose ownership has been held for at least one year; taxpayers owe money on capital appreciation when they sell an asset. A dividend tax applies to distributions of profits that companies make to their shareholders.
Biden’s policy would only apply to the richest Americans – the richest 0.3%, or those with incomes of $ 1 million or more. It would be among the highest rates on capital gains and dividends in the developed world.
But the House Ways and Means Committee legislation unveiled on Monday would tax capital gains and dividends at a much lower maximum rate of 25%. The House proposal would apply to single filers with at least $ 400,000 in income and to married couples with $ 450,000.
In other words: Biden’s plan would have raised the highest federal tax rate by 98% (compared to the current law) for the richest Americans, while the House proposal increases it by 25%. The House plan would also raise taxes for a wider range of people.
“This change is FANTASTIC for the richest,” wrote Jeffrey Levine, accountant and chartered financial planner, who is director of planning at Buckingham Wealth Partners, in a Tweeter.
“For the ‘simply’ affluent taxpayer though? Not so much,” he added.
An existing 3.8% Medicare surtax and state levies would be added to any federal rate changes.
The rich derive more of their income from investments than from wages compared to low and middle incomes.
For example, the richest 0.1%, who earn $ 3.4 million or more, derive more than half of their annual income from capital gains, dividends and interest; a quarter comes from salaries and benefits, according to a Tax Policy Center 2019 analysis.
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By comparison, salaries and benefits account for around 60-70% of annual income for taxpayers outside of the top 1%, according to the analysis.
“[The House proposal] is obviously not as punitive from their point of view as the original proposals, “said James Hines Jr., professor of economics and research director at the Office of Fiscal Policy Research at the University of Michigan, about of the rich.
Of course, wealthy Americans may not applaud either proposition; they probably would prefer their tax rate not go up at all, Hines said.
Capital gains on death
The plans also differ in how they would tax inheritances that have appreciated in value considerably.
Biden’s plan would be impose the capital gain on an asset on the death of its owner. This would be aimed at preventing the super rich from continually passing stocks and other financial assets to the next generation for little or no tax.
(Capital gains less than $ 1 million for single tax filers and $ 2.5 million for married couples would be exempt.)
The House plan preserves the status quo, which does not impose this tax on death. The existing law also allows heirs to receive an asset at its current value, thus wiping out the paper gain and thus diluting their future tax bill if they sell.
The wealthiest families receive the largest inheritances – $ 719,000, on average, at the time of inheritance, according to the Federal Reserve’s survey of consumer finances. (The average for all Americans is $ 46,000.)
Inheritances are not necessarily the result of capital gains. But a significant portion of the economic gains for wealthier Americans are attributable to unrealized capital gains, according to the Federal Reserve. About 41% of the richest 1% have an unrealized capital gain.
Of course, the final legislation could ultimately change both House and Biden’s proposals as Democrats attempt to raise funds for up to $ 3.5 trillion for education, health care, custody. children, climate, paid holidays and other measures.
“We are now in the second or third round,” said Léon LaBrecque, accountant and chartered financial planner at Sequoia Financial Group.