Joe Biden campaigned for president on promises to spend big on infrastructure and social programs, with the plans to be paid for by new tax revenues on corporations and wealthy households. Now, a new document sheds light on what those increases might look like and who they might affect.
The U.S. Treasury Department’s Green Book, released May 28, lays out an agenda that includes raising the top individual income tax rate and the rate paid on capital gains. Biden has insisted that his tax increases on individuals will target only Americans earning more than $400,000 per year.
Bear in mind that the Green Book proposals are just that. We’re a long way from new tax laws—the contours of such legislation are still being debated in Washington, and the most optimistic projections call for the passage of legislation by late summer.
It’s likely that many of Biden’s proposals will be reworked or will fail to be enacted into law. Here’s what we know right now:
Biden wants to raise the top income-tax rate from the current 37% to 39.6%–while also lowering the income thresholds for paying that higher rate. Here’s how the income thresholds break down by taxpayer:
- Married filing jointly: $509,300 (currently $628,300)
- Single: $452,700 (currently $523,601)
- Head of household: $481,000 (currently $523,600)
- Married filing separately: $254,650 (currently $314,150)
The Green Book assumes the tax increases will become effective at the beginning of 2022. But there has been at least some talk on Capitol Hill about making the hikes retroactive to April 28, 2021.
One of the themes in Biden’s tax proposals is a desire to treat income from capital the same as income from labor. For example, the administration’s plans call for taxing capital gains as ordinary income for taxpayers with incomes over $1 million. That income would no longer be subjected to the lower, 20% capital-gains rate on assets held for more than a year.
Until now, when heirs received assets like stocks, bonds, and real estate, any gains in value those assets had accrued before being transferred were overlooked for tax purposes. Biden wants to eliminate that accounting fiction, known as cost-basis step-up, and levy capital gains taxes on households with incomes over $1 million.
The capital gains tax would be imposed in addition to the estate tax, which currently kicks in on wealth above $11.7 million for individuals and $23.4 million for married couples. Transfers to a spouse or a charity are excluded from the capital gains tax. And the Biden administration has said that capital gains taxes would not apply to family farms or to businesses that are left to family members, so long as those heirs continue to operate the family businesses. It remains to be seen whether these exceptions can be effectively carved out, given the complexities of tax legislation.
Republicans in Congress are balking at any tax increases, including Biden’s proposed hike in the corporate rate from the current 21% to between 25% and 28%.
Liberal lawmakers, meanwhile, want to go further than Biden. Bernie Sanders, the Vermont senator who chairs the Senate budget committee, has proposed a progressive estate tax, starting at 45% on estates valued between $3.5 million and $10 million, and topping out at 65% for those valued above $1 billion.
Our view is that tax legislation is likely to pass, but will look at least somewhat different from the proposals spelled out in the Green Book. In the meantime, we’ll continue to keep a close eye on tax developments in Washington, as well as how those changes might impact our clients’ tax-planning needs. Please don’t hesitate to contact us with any questions.