The Biden administration has outlined several tax changes that would affect high‑income earners and investors. Below is a concise overview of six key proposals and the practical implications they could have for individuals and businesses.
1. Restoring the 39.6 % top marginal income tax rate
- Current situation: Under the Trump administration the top federal rate was reduced to 37 %.
- Proposed change: Raise the top bracket back to 39.6 % (federal only). State taxes would be added on top, pushing the effective rate above 50 % in many jurisdictions.
- International context: The rate remains lower than those in Canada and many European nations, so it is unlikely to make the U.S. uncompetitive globally.
- Considerations:
- The increase is modest compared with other developed economies.
- Taxpayers may still face high overall burdens when state and local taxes are included.
2. Taxing capital gains and qualified dividends as ordinary income for incomes above $1 million
- Current structure: Long‑term capital gains and qualified dividends are taxed at lower rates (15 %–20 %) than ordinary wages.
- Proposed change: Treat gains and dividends above $1 million the same as ordinary income, potentially raising the rate to 39.6 % (or higher when combined with state taxes).
- Rationale presented: Align taxation with a merit‑based system where market‑generated value, not tax treatment, determines after‑tax earnings.
- Counterpoint:
- The corporate‑level tax already paid on earnings means double taxation of dividends if they are taxed at the full individual rate.
- Eliminating the preferential dividend rate could increase the overall tax burden on shareholders without a clear economic benefit.
3. Repealing the step‑up basis at death
- Step‑up basis explained: When an asset is inherited, its tax basis is “stepped up” to the fair market value at the decedent’s death, allowing heirs to sell without recognizing prior appreciation.
- Proposed repeal: Remove the automatic step‑up, meaning heirs would inherit the original cost basis and could face large capital‑gain taxes upon sale.
- Potential impact:
- Could discourage wealth accumulation and intergenerational transfer of family businesses.
- May motivate more philanthropic giving during a donor’s lifetime.
- A $5 million exemption would still apply, limiting the effect to larger estates.
4. $20 million minimum tax on individuals with $100 million in assets (often called the “billionaire tax”)
- Mechanism: A wealth tax that would assess a minimum tax liability of $20 million on anyone whose net worth exceeds $100 million, regardless of whether assets are sold.
- Criticism:
- Taxing unrealized gains forces taxpayers to pay on paper wealth, potentially creating cash‑flow problems.
- The proposal resembles a wealth tax rather than a traditional income tax and may be difficult to administer.
5. Repealing the carried‑interest exemption
- Current rule: Hedge‑fund managers and private‑equity partners receive a portion of their compensation as “carried interest,” taxed at the lower capital‑gains rate.
- Proposed change: Tax carried interest as ordinary income, eliminating the preferential rate.
- Argument for change: Tax treatment should be neutral; identical economic contributions should not receive different tax rates.
6. Limiting or repealing 1031 like‑kind exchanges
- What 1031 exchanges do: Allow deferral of capital‑gain tax when a property is sold and the proceeds are reinvested in a “like‑kind” property.
- Proposed limits: Reduce the exemption to $500 000 for individuals and $1 million for married couples, or eliminate it entirely for certain asset classes (e.g., art).
- Implications:
- Could reduce the tax advantage that has historically encouraged real‑estate investment and turnover.
- May affect liquidity for investors who rely on the deferral mechanism to upgrade properties.
Practical takeaways for high‑net‑worth individuals
- Plan for higher marginal rates – If the top rate returns to 39.6 %, consider the combined effect of federal, state, and local taxes on both earned and investment income.
- Review dividend and capital‑gain exposure – Income above $1 million could be taxed at ordinary rates, so restructuring portfolios to favor tax‑efficient assets may become more important.
- Estate‑planning adjustments – The loss of a step‑up basis may make charitable trusts, gifting strategies, or other estate‑tax mitigation tools more attractive.
- Liquidity considerations for wealth taxes – A minimum tax on unrealized wealth could force the sale of assets or the use of borrowing to meet tax obligations.
- Compensation structures – Hedge‑fund and private‑equity managers should anticipate that carried‑interest income may be taxed at ordinary rates, affecting compensation negotiations.
- Real‑estate transaction strategy – Potential limits on 1031 exchanges could alter the timing of property upgrades and the overall cost basis of investment portfolios.
Overall, while none of the proposals appear to make the United States dramatically less tax‑competitive, they would increase the after‑tax cost of high earnings and wealth accumulation. Stakeholders should monitor legislative progress and adjust financial, estate, and investment plans accordingly.
