For individual and married taxpayers, the marginal tax rate increase that is proposed in Biden’s plan is largely consistent with the House Democrats’ proposal. The highest marginal bracket would increase from 37% to 39.6%; however, this proposal is more progressive than originally thought as it would apply to taxable income in excess of $400,000 for individual filers and $450,000 for married filing jointly, rather than approximately $400,000/$625,000 as originally proposed.
The proposal also enacts a new surcharge on incomes in excess of $5mm for both individuals and married taxpayers. The surcharge is a flat 3% tax and would act to increase the highest marginal income tax rate to 42.6%. The $5mm threshold would also include income earned through the recognition of capital gains.
With respect to the capital gains tax, the proposal would be less punitive than originally feared. A more modest increase from 20% to 25% on long-term capital gains was negotiated instead of creating a new “ordinary income” bracket for capital gains in excess of $1mm. Unlike many of the other provisions in this proposed legislation, the 25% rate could be effective immediately upon gains recognized following the passage of the bill, which is currently expected to be on or around October 1, 2021. It is important to note that it would not be retroactive to January 1, 2021, so all previously recognized portfolio activity or any sale agreed upon prior to October 1st but executed post October 1st (i.e., signed real estate contract or agreed upon business sale) would still be subject to the 20% capital gains rate. By increasing the capital gains rate to 25%, this additional burden will apply to a broader segment of the population, not just ultra-high-net-worth investors. Additionally, the 25% tax rate would apply to qualified dividends which, under current law, are also taxed at a maximum rate of 20%.