Biden Proposes New 5-8% Tax Surcharge on Millionaires

On October 27th, President Joe Biden and members of the House of Representatives adjusted their tax plan proposing a new surcharge of 5% on individuals earning more than $10 million a year. That’s more than the 3% that was suggested previously and comes after members of the House proposed to tax the paper profits of billionaires. The latest plan intends to levy an additional 3% surcharge on those making more than $25 million. Those wealthy taxpayers would thus pay an additional 8% on top of the top ordinary rate, now 37%.

Neither the House document nor fact sheet from the White House made any mention of raising the top ordinary rate to 39.6% as Biden and representatives had previously called for. Nor did the documents mention the administration’s and lawmakers’ prior call to raise the top capital gains tax to 28.3% from the current 23.8%.

The new proposal would also close the Medicare Self-Employment Tax Loophole by strengthening the 3.8% net investment income tax for people making more than $400,000.

Some reports believe that unspecified changes to the $10,000 cap on state and local tax deductions, including for property taxes, would likely be in the final package. Biden is seeking ways to pay for his dialed-back social spending and climate bill, now costing $1.75 trillion instead of the original $3.5 trillion.

Key points from the proposal summary include, but are not limited to:

  • Taxpayers with more than $100 million in annual income or more than $1 billion in assets for three consecutive years would be required to pay annual taxes on their stock and bond profits, even if they’re only on paper. Individuals and trusts that pay taxes will be affected as well.
  • Paying capital gains tax on profits regardless of whether they’re the result of a sale or not is known as “mark-to-market.” Billionaires can pay the initial taxes over five years. In years after the first tax is due, they would pay tax on their subsequent gains. While the current top capital gains rate is 23.8%; some House Representatives want to raise it to 28.8%.
  • Capital losses could be carried back for up to three years in certain circumstances. Non-tradable, hard-to-value assets like real estate, a partnership interest, or a business would bear a new, one-time interest surcharge when sold. Billionaires would pay their usual tax, plus a new deferral recapture amount that’s equal to the interest on the tax that was deferred while the individual held the asset. The interest rate for “deferral recapture amounts” will be calculated by the short-term federal rate; currently at 0.18%. Non-publicly traded assets, the total tax owed, including the interest surcharge, would be capped at 49%.
  • Interest would not be tallied for assets sold before the proposal goes into effect or in the first tax year that a taxpayer is subject to the Billionaires Income Tax, whichever is later.
  • Billionaires would be able to exclude up to $1 billion of tradable stock in a single corporation from being taxed before sold. 
  • Billionaires would fall out of the three-year rule for $1 billion in assets or $100 million in income only if their assets or income shrink below half of those thresholds for three back-to-back years.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.