Proposed tax increases in President Biden's budget proposal for fiscal year 2025, which includes $4.9 trillion in higher revenue over ten years through costly tax increases on wealthy individuals and businesses, would hike U.S. tax rates and increase revenues to 20.3% of gross domestic product (GDP) by 2034, the highest rate in the nation's history. The proposed tax code includes new and higher taxes on wealthy individuals, higher‐income families, and employers, including complicated tax credits, exemptions and deductions.
The budget plan acknowledges, but does not explicitly extend, the 2017 Tax Cuts and Jobs Act (TCJA), which expires at the end of 2025, raising taxes for nearly everyone. Therefore, Biden's proposal does not account for around $2 trillion in decreased revenue by making the Republican tax cut permanent for people earning less than $400,000 a year.
Here's a Look at Key Proposals Impacting the Wealthiest Americans
Net investment income tax (NIIT)
Biden wants to increase the NIIT rate by 1.2 percentage points for taxpayers earning more than $400,000, raising the marginal NIIT rate to 5% (3.8% + 1.2 percentage points). His plan would also increase the current 0.9% additional Medicare tax by 1.2 percentage points for taxpayers earning over $400,000. Biden's plan includes expanding the NIIT to ensure that all pass-through business income of high-income taxpayers is subject to either the NIIT or Self-Employed Contributions Act (SECA) tax. These hikes are estimated to raise $650 billion over a decade.
Additional Medicare tax
Wealthy people would pay their "fair share" toward Medicare to extend Medicare solvency, rather than slashing benefits or raising costs for beneficiaries, under Biden's plan. Current law permits certain wealthy business owners to avoid Medicare taxes on some of the profits they earn from pass-through businesses. Biden's plan aims to close this loophole and hike Medicare tax rates on earned and unearned income from 3.8% to 5% on earnings over $400,000. Self-employed individuals remit both employer and employee burden of payroll taxes.Top marginal tax rate
Increasing the top marginal rate for high-income earners to 39.6% would apply to taxable income over $450,000 for joint filers, $400,000 for single filers, $425,000 for head of household, and $225,000 for married couples filing separately. Biden said during his State of the Union (SOTU) address that the average federal tax for billionaires is 8.2%, which is based on an alternative calculation from economists in his administration that factors in unrealized capital gains that are not treated as taxable income under federal law.
Capital gains (including of appreciated property)
Ordinary rates will apply to long-term capital gains for taxpayers with taxable income of more than $1 million. Transfers of appreciated property by gift or by death will be treated as realization events for which a capital gains tax would apply, unless the money is passed on to a spouse or a charity. This proposal is estimated to raise some $213 billion over a decade budget window. Transfer of wealth to a spouse or charity would carry over the basis of the donor or decedent, and for the surviving spouse the gain is not realized until the surviving spouse dies or disposes of the asset.
Minimum income tax for wealthy taxpayers
Biden said in his SOTU address that imposing a 25% minimum tax on income for those with wealth of more than $100 million would generate $500 billion over 10 years to help fund benefits such as childcare and paid family leave. The 25% minimum tax on total income would be generally inclusive of capital gains.
Repeal deferral of gain from like-kind exchanges
A deferral of gain would be imposed up to an aggregate amount of $500,000 for each taxpayer, or $1 million for joint filers, per year for real property exchanges that are like kind. Gains from like-kind exchanges in excess of $500,000 for an individual or $1 million for joint filers would be recognized by the taxpayer in the year of transfer of the real property subject to the exchange.
Tax carried interest as ordinary income
Carried interest is typically treated as long-term capital gains, meaning it is taxed at 20% as opposed to ordinary income. Biden seeks to tax carried interest as ordinary income.
Bottom line: Biden's budget proposal for fiscal year 2025 has the greatest impact on wealthy individuals. Regardless of the outcome of the presidential election, those with income over $400,000 should speak with their financial advisors about potential complex tax credits, exemptions, and deductions.
Disclaimer
Eaton Vance and Morgan Stanley do not provide legal, tax or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy.
