Many Americans still don’t realize that we have a bifurcated tax system. One tax table is focused on taxing Americans on their ordinary income, the income you earn from your job or your business. The other tax table is focused on taxing your long-term capital gains, meaning assets that have grown in appreciation such as stocks or your business value held more than 365 days.
According to a report issued by the Treasury Department, led by Secretary Janet Yellen, Biden’s proposed fiscal year 2025 budget would increase the top marginal rate on long-term capital gains and qualified dividends to an astonishing 44.6%. Today, that top marginal long-term capital gains rate is at 23.8%. Do NOT get fooled when you hear or read that the increase is ONLY a 20.8% increase, when in fact it would be an 87.
Second, the top long-term capital gains marginal tax rate would adjust to the top ordinary income marginal tax rate, meaning it would move from 20% to 39.6% for capital gains. Third, let’s remember recent relevant history with the tax code. The Affordable Care Act was signed into law on March 23, 2010, and instituted the ObamaCare surtax of 3.8%, or what is known as the net investment income tax .
Why would this crush the economy? If these new policies take effect when the Tax Cuts and Jobs Act of 2017 expires at the end of 2025, we will be staring down a barrel in 2025 of millions of Americans selling off their highly appreciated stock positions at today’s long-term capital gains rates versus paying double in 2026. The simplicity of this is that the law of supply and demand holds true with the stock market.
Under the new proposed Biden tax plan, 10 states would have more than a 50% capital gains tax, with California being the highest at 57.9%. Those that have investment real estate in their portfolios may also consider selling these properties and if interest rates remain high, it could put a glut of properties into the marketplace where we struggle to find future buyers, including millennials and GenZ who are falling far short today to muster up even a down payment on a new home.