written on behalf of Feigenbaum Law
Back in April, we wrote about how both the United States and Canada were planning on raising tax revenue in large part by imposing higher taxes on people in the highest tax brackets. As Canada gets ready for an election, we are bound to see the major political parties sharing their suggestions for tax planning, though few new details are available at this time. Meanwhile, in the United States, the Biden administration is pursuing a final push to get its budget, and the tax implications that follow, approved.
Democrats pass budget outline
On Wednesday it was reported that Senate Democrats have passed a $3.5 trillion budget plan, with votes falling along party lines. While not an official budget, the Senate’s passing of the plan directs committees to craft a bill that follows the plan’s guidelines.
What are the tax implications that may arrive?
One of the Biden administration’s plans to raise tax revenue is to raise the top marginal income tax rate by over 2.5% from 37% to 39.6%. This will of course have a significant impact on high-income earners who draw their income from salaries. Currently, the highest tax bracket is in place for people earning $622,051 or more. This would mean that someone at the lowest end of that bracket would end up paying $16,173 more in taxes annually. Democrats have stated that the plan isn’t entirely new, but is instead a fast-tracking of plans already enacted through law to increase taxes by the same amounts by 2025.
Capital gains taxes to increase
People who draw income through capital gains are unlikely to feel any relief with the plan. The Biden administration is also planning to raise the highest rate of capital gains tax to 39.6% in order to match their plans for an increased highest income tax bracket. This would apply to people who earn more than $1 million annually from capital gains. This would be in addition to a 3.8% surtax imposed on investment income, meaning the actual tax rate would be 43.4%.
Changes for wealthy estates
The final of the most significant plans by the Biden administration is a change to how assets that have appreciated in value are taxed upon being passed on. The current law is known as a “step-up”, which means that if someone passes away and has an investment portfolio worth $2 million that grew from contributions totaling $150,000, the people who inherit that portfolio could sell it for $2 million and pay no capital gains taxes. They would only pay tax on any value realized after they take ownership of the portfolio. The new plan is known as a “carryover” which means that the heirs would have to pay capital gains taxes on the $1.5 million the investment earned.
What happens next?
As we mentioned earlier, the Senate’s passing of the plan does not bring any new legislation to the table. The plan will now go back to President Biden’s desk, and at some point, Congress will meet to approve a budget and then pass legislation. This process can take months to even begin. However, CNBC reported that Senate Majority Leader Chuck Schumer has given Senate committees a deadline of September 15 to put together their portions of the bill.
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