Developing a plan around taxes is a critical component to financial success. However, things become increasingly complicated as politics enter the picture, and both sides of the aisle push for their preferred tax policies. They may be consistent for a few years, then change if an election swings either way. The most recent example of this is Joe Biden’s 2025 budget proposal. The proposal itself is very broad. It addresses everything from corporate tax rate hikes to nutrition assistance, but there are key tax provisions aimed specifically at households with high net worth/income. If the proposal comes to fruition, it would:
- Raise the Net Investment Income Tax (NIIT) and additional Medicare tax rate on earned and unearned income from 3.8% to 5% for household income above $400,000.
- Apply the NIIT to passthrough business income.
- Tax unrealized capital gains for households with at least $100,000,000 in assets.
- Increase the top marginal income tax rate of 37% to 39.6%.
- Tax capital gains and qualified dividends at ordinary income tax rates for incomes over $1,000,000. This would increase the tax rate from 20% to 39.6%.
- Limit contributions and accumulation for Individual Retirement Accounts (IRAs) with balances over $10,000,000.
- Force gains above a $5,250,000 exemption ($10,500,000 joint) to be realized at death and taxed. These amounts include the “home gain exclusion”.
- Cap 1031 like-kind exchanges to $500,000 for a single filer, and $1,000,000 for joint filers.
- Make cryptocurrency transactions subject to the “wash sale” rule.
- Increase IRS funding for audits and enforcement of taxes on high-net-worth individuals.[1]
If any of these proposed changes apply to your current situation, it is more than likely not worth immediate action. Budget proposals don’t affect much in the short term. Especially with a divided congress. According to the Brookings Institute:
“For several decades the president’s budget has been described as “dead on arrival” in Congress, with both budget watchers and members of Congress alike describing it as such since at least the mid-1980s”. [2] Budget proposals (as a whole) are largely symbolic; however, their components are still important in the context of your financial plan. Budget proposals lend insight into either party’s philosophy regarding the federal deficit, how to handle it, and by extension, taxation.[3] Regarding the Biden administration, the attitude towards deficit reduction is to raise revenue through tax increases. If congress were to flip, then any of these proposed elements could eventually pass on their own, or as riders on other bills.
Every financial plan will consider taxes. But thorough ones have contingency plans if the legislative landscape changes. If you are armed with knowledge of an administration’s intent and proposed strategies, it gives you time to prepare for a shift in tax policy. Being able to pivot if the underlying tax assumptions of your strategies change is invaluable. For most, these elements will not affect them, but for higher income earners, there are financial and estate planning ramifications that need to be considered. Should any of these provisions become law, our advisors at Legacy Trust will be prepared to help you determine its application and the best course of action.
Collin Hartley, Associate Wealth Planner
——-
[1] https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/11/fact-sheet-the-presidents-budget-for-fiscal-year-2025/
[2] Reynolds, M. (2023, March 10). The President’s Budget and the Battle Ahead. Brookings. https://www.brookings.edu/articles/the-presidents-budget-and-the-battle-ahead/
[3] ibid