Five Things High Income Earners Need to Know About Biden’s New Tax Proposal

Five Things High Income Earners Need to Know About Biden’s New Tax Proposal

We’ve read the whole proposal so you don’t have to, and pulled out the top 5 things high-income earners need to know. Let’s dive in…

1. Top Ordinary Income Tax Rate

  • Ordinary income is defined as:
    • Interest, dividend, w2, k1, social security, and pension
    • Basically, it’s all things but long-term capital gains – which we’ll get to next – and qualified small business stock.
  • This proposed change would apply to taxable income above: 
    • $452,700 for unmarried individuals, 
    • $481,000 for head-of-household filers, 
    • $509,300 for married individuals filing a joint return, 
    • and $254,650 for married individuals filing a separate return.
  • Prior to 2017, the top tax rate for ordinary income was 39.6%.
  • In 2018, Trump’s tax plan changed it to 37% and reduced tax rates for everyone.
  • Biden is rolling that back to 2017 levels that’s an annual 2.6% cut to your after-tax dollars.

2. Long-term Capital Gains

  • Capital gain refers to an increase in a capital asset’s value and is considered to be realized when the asset is sold. 
    • This means if you buy something as an investment then sell it at a profit, you have to pay tax on that profit.
    • A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes
    • The Biden tax proposal is doubling capital gains tax for investors making over $1M, from 20% to 40%.
    • $400k-$999k is still at 20% 
    • Once you hit a million you’re now subject to 40% in the new proposal

3. Net Investment Tax

  • Net investment income currently can be capital gains, interest, or dividends. It can include income produced by rental properties, capital gain distributions from mutual funds, and even royalty or annuity income and interest on loans you might have extended to others.
    • Currently, Anything beyond $200K for Single filers and $250k for MFJ filers are subject to a net investment tax of 3.8% on top of the $37% ordinary income.
    • Biden’s change would impose this tax on ALL investment income (passive or not) for taxpayers earning more than $400k 

4.  Self-Employment Tax

  • Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most W2 wage earners.
    • Currently, the self-employment tax is 15.3%, which breaks down to you paying 7.65% as the employee and 7.65% as the employer.
    • This tax is subject to all earned income up to $142,800, After that, you and your employer are no longer subject to this tax.
  • Biden is proposing that high-income earners – people making over $400,000 a year – pay an extra 7.65% on anything over $400,000. This not only reduces you after-tax dollars personally but hits businesses as well. 

5. Like-Kind Exchanges

  • A like-kind exchange is a tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset.
  • Currently, there is no cap on Like-Kind Exchanges and no taxes paid on those exchanges of property. 
    • So whether you sold a building for $3.5 million or $20 million, there would be no tax as long as you invested that money right back into the same kind of business property.
  • Biden’s proposed tax plan implements a cap on Like-Kind exchanges at $500,000 for a single filler and $1M for MFJ Filler.
    • This means any gain made on selling property over $500,000 or $1M, depending on how you file would be taxed, even if you bought another building with that difference.

Do one or all of these apply to you? Call us today to help you identify what your next steps should be if these changes were to become law.