By Brandon Miller–
With an election right around the corner, taxes may be a central issue on the campaign trail. With the Tax Cuts and Jobs Act (TCJA) set to expire in a year and a half, candidates are being pressed on their positions regarding the future of U.S. tax policy. Let’s break it down.
Capital Gains Tax Increases
One of the most significant proposals being discussed is an increase in the capital gains tax rate. Currently, the highest capital gains tax rate is 20%, which many argue favors the wealthy, who own most of the capital assets like stocks and real estate. Many Democrats propose increasing this rate to 39.6% for individuals earning over $1 million annually, aligning it with the top marginal income tax rate that existed before the TCJA, though Kamala Harris has suggested the max under her administration would be 28%.
However, the potential increase in the capital gains tax rate doesn’t tell the whole story. Currently, an additional 3.8% Net Investment Income Tax (NIIT) applies to many taxpayers, effectively raising the capital gains tax to 23.8%. Under the aforementioned proposal, this NIIT would also apply on top of the proposed 39.6% rate, along with a proposed 1.2% additional Medicare tax, potentially bringing the total capital gains tax rate to as high as 44.6%.
Step-Up in Basis Elimination
Another contentious proposal is the elimination of the step-up in basis at death. The current step-up in basis rule allows heirs to reset the value of inherited assets to the market value at the time of the original owner’s death, significantly reducing potential capital gains taxes. A plan to eliminate this provision is a move that would have significant implications for estate planning and investments.
Although similar policies exist in other countries, such as Canada, past attempts to eliminate the step-up in basis in the U.S. have failed. Given the strong opposition from various interest groups and even within the
Democratic Party, this proposal faces significant hurdles.
Marginal Income Tax Rate Increases
Currently, the top marginal income tax rate is 37%, down from 39.6% under the TCJA. It could return to the top rate of 39.6%. This change would represent a significant shift, particularly for those near the top of the income brackets who benefited from the TCJA’s broader 24% tax bracket.
The TCJA expanded the 24% tax bracket, covering a wide range of incomes, which has resulted in many taxpayers falling into this bracket. If the TCJA expires without adjustment, individuals in this range could see their rates jump to 25%, 28%, or even 33%, depending on where their income falls within this wide bracket.
Medicare Tax Increases
Medicare funding is another area of concern, with discussions of increasing the Medicare tax rate from 3.8% to 5% for individuals earning over $400,000. Although changes to the Medicare tax may not directly impact most taxpayers, it highlights ongoing efforts to address underfunding issues in this essential program.
Corporate Tax Increases
The TCJA made corporate tax cuts permanent, lowering the corporate tax rate to 21%. The Democratic plan may propose increasing this rate to 28% and limiting deductions on executive compensation over $1 million. These changes aim to address perceived inequities in how the TCJA benefited large corporations, particularly in contrast to the temporary nature of individual tax cuts.
1031 Exchange Reforms
Section 1031 exchanges, which allow for the deferral of capital gains taxes on like-kind real estate exchanges, are also under scrutiny. While once primarily utilized by sophisticated investors, these exchanges have become more common among average taxpayers as real estate values have risen. Proposals to eliminate or limit 1031 exchanges could face strong resistance from the real estate industry.
Carried Interest Loophole Closure
The carried interest loophole, which allows investment managers to pay lower capital gains tax rates on their income, is another target for reform. Closing this loophole would require these earnings to be taxed as ordinary income, aligning the tax treatment of these earnings with that of most other income earners.
Billionaire Minimum Tax
Another proposal, currently in the Ways and Means committee, is a 25% minimum tax on households with a net worth exceeding $100 million. This would target unrealized gains, a controversial move since it involves taxing asset value increases before they are sold. The Supreme Court has recently addressed related issues, which could influence the feasibility of such a tax.
Higher Excise Tax on Stock Buybacks
A higher excise tax on stock buybacks is also on the table, with an existing 1% tax potentially being increased. Stock buybacks have been criticized for benefiting shareholders at the expense of other corporate priorities, and this proposal aims to curb that practice.
As the expiration of the TCJA approaches, the debate over tax policy is set to intensify. The Republicans generally favor maintaining the TCJA, while Democrats push for reforms that target the wealthy and corporations. However, the cost of fully maintaining the TCJA—estimated at $4.5 trillion—presents a significant fiscal challenge, likely leading to compromises and adjustments.
The upcoming elections will be crucial in determining the direction of these tax policies. For now, it’s important for taxpayers and advisors alike to stay informed and prepare for possible changes that could affect everything from individual tax rates to estate planning strategies.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals. For more information: https://www.briofg.com/
Money Matters
Published on September 19, 2024
Recent Comments