Let’s discuss the taxation of capital gains
In light of the president’s proposal to impose more taxes on the rich, including higher tax rates on their gains and subjecting some unrealized gains to income tax.
Long-term capital gains get favorable rates
Gains from the sale or exchange of capital assets held over a year are generally taxed at 0%, 15% or 20%. There’s also the 3.8% surtax on net investment income of single filers with modified adjusted gross income of more than $200,000…$250,000 for joint filers.
The rates are based on set income thresholds, which are adjusted annually for inflation
For 2023, the 0% rate applies to individuals with taxable income up to $44,625 on single returns, $59,750 for household heads, and $89,250 on joint returns. The 20% rate starts at $492,301 for single filers, $523,051 for heads of household and $553,851 for married couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points.
The rules are set to change after 2025
When most of the provisions affecting individuals under former President Trump’s Tax Cuts and Jobs Act expire. Unless lawmakers act, starting in 2026, the rules will revert to those in place in 2017. Under pre-2018 law, long-term capital gains were taxed at 0%, 15% and 20% rates, with the rates based on your income tax bracket. The 0% rate applied to taxpayers in the 10% or 15% tax bracket, the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for people who landed in the other brackets. The 3.8% tax on NII of upper-incomers also applied under the same rules that are now in effect. GOPers want to extend the tax law changes, while Dems want higher rates on the rich.
If President Biden got his way, the wealthy would pay more capital gains tax
First, he would tax long-term capital gains at ordinary rates up to 37% for taxpayers with taxable incomes over $1 million…$500,000 for separate filers.
Second, he would hike the 3.8% surtax on net investment income to 5% for taxpayers with more than $400,000 of income. More specifically, the tax would rise by 1.2 percentage points on the lesser of NII or modified AGI over $400,000.
Third, he would impose a 25% minimum income tax on the ultrarich… people with at least $100 million in wealth. The tax would apply to taxable income plus unrealized capital gains, meaning the gain on appreciated assets not yet sold or disposed of. The proposal defines wealth as the value of assets minus liabilities.
Fourth, he would tax unrealized gains at the time of gift or death. This idea isn’t new. Biden pushed hard for it in 2021 in his failed Build Back Better plan. He’d essentially treat death or a gift as a realization event for income tax purposes… a deemed taxable sale of assets at fair market value…with a lifetime gain exclusion of $5 million. There are lots of exceptions in Biden’s proposal. Household furnishings and personal effects are exempt. Ditto for transfers to spouses or to charity. Family-owned businesses and farms would escape tax, provided heirs run them. And the gain exclusion of $250,000/$500,000 on home sales would continue to apply.