Don't Mess With Taxes

President Joe Biden has targeted capital gains tax laws in his fiscal year 2025 budget.

But don't freak out if you have some money in the markets.

For the most part, Biden's looking to get more from really wealthy market mavens who typically pay lower capital gains tax rates on the long-term assets they sell.

Collecting billionaires' unrealized capital gains: When you sell an asset for more than your paid for it, that profit is a capital gain. The tax rate for these gains typically is less than ordinary tax rates that apply to earnings like wages.

In most cases, capital gains and qualified dividends are taxed at a top personal income tax rate of just 20 percent, compared to a the top ordinary income tax rate of 37 percent.

That rate disparity is why the wealthy, who tend to rely on capital gains income more than on ordinary earnings, often end up paying a lower tax rate than what we regular Joe and Jane Taxpayers pay at filing time.

Richer investors also have more leeway as to when they cash in their assets and owe any tax. As the assets' values grow, these unrealized capital gains are out the tax collector's reach.

Biden's proposal dubbed the Billionaire Minimum Income Tax would collect on the unrealized capital gains of taxpayers with a net worth between $100 million and $200 million. The tax would be phased in, with investors wealthy enough to be subject to the billionaire levy facing at tax of at least 25 percent of their total income, including unrealized capital gains, each year.

Other proposed capital gains changes: Biden also wants to limit two other capital gains tax breaks.

The White House budget proposes to tax all income exceeding $1 million at the top ordinary personal income tax rate — which also would be bumped from 37 percent to the pre-Tax Cuts and Jobs Act (TCJA) rate of 39.6 percent — regardless of whether it is capital gains, dividends, or some other type of income.

Biden also wants to end the current tax rule that exempts all capital gains on unsold assets, those sneaky unrealized capital gains, that are passed to heirs when the original owner dies. Now those assets' values are stepped up; that is, they are valued at the time of the owner's death, rather than when they originally were purchased.

That allows an heir who, for example, gets an asset valued at $1 million to sell it for that price and not owe any capital gains, even if the inherited asset originally was worth only a fraction of the inherited value. That shuts the Internal Revenue Service out of any capital gains collections.

Biden's proposal would treat these unrealized gains as taxable income for the final year of a taxpayer's life. The president would still exempt $5 million of unrealized gains per individual, double that for a married couple. Family businesses, including farms, would be allowed to delay the tax if the business continues to be owned and operated by surviving family members.

Capital gains for the rest of us: The Biden budget proposals are like all made by every president. They are a wish list.

The only chance Biden has to enact these capital gains tax changes is to be re-elected and have Democratic House and Senate majorities join him in Washington, D.C. next year.

That means that the existing capital gains tax rates will continue for the foreseeable future, which realistically is through 2025, or the last year of the TCJA tax law changes.

For those of us who might have taxable capital gains to report on our 2023 returns, the table below shows the applicable long-term capital gains rates and income brackets to which they apply.

For 2024 tax year planning, the following table shows the capital gains tax rates and incomes that apply this tax year to returns filed in 2025.

Capital gains tax miscellany: Yes, that zero level in the above tables is correct. Some lower-income investors won't owe any tax on their capital gains.

Higher earners, however, could owe more under the current tax laws.

In addition to the capital gains tax, wealthier taxpayers may also have to pay the additional 3.8 percent net investment income tax, or NIIT. The NIIT applies to single taxpayers with adjusted gross income (AGI) of more than $200,000. The NIIT income trigger for married filing jointly couples is $250,000.

Biden's budget would increase the NIIT rate to 5 percent for individuals earning at least $400,000 and $450,000 for couples.

And finally, there are other capital gains tax rates for other holdings, like collectibles.

You also might find these items of interest:

• Wider tax brackets in 2024 will lower what some taxpayers owe Uncle Sam
• Texas man charged in apparent first-ever criminal crypto capital gains tax case
• Inflation eases tax bites in 2024 on capital gains, estates, and other wealth-related income

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