Biden’s Proposal for a New Wealth Tax

In a bid to address economic disparities and ensure a fairer tax system, President Biden included a new proposal in his Greenbook aiming to impose a minimum income tax on the wealthiest taxpayers in the United States.

This initiative targets those with a net worth exceeding $100 million, introducing significant changes to how capital gains and unrealized income are taxed.

As we near the 2024 U.S. Presidential Election, it is important to track all candidates’ tax proposals. We have created a tracker so you can do just that.

Current Tax System for Capital Gains

Under the current tax law, long-term capital gains and qualified dividends are taxed at graduated rates, with the highest rate being 20% (or 23.8% including the net investment income tax).

These taxes are only applied when the asset is sold or otherwise disposed of, allowing for the deferral of taxes on the appreciation of assets.

In cases where assets are passed on at death, the basis is typically stepped up, often eliminating the federal income tax on those gains entirely.

Rationale for Change

The existing tax structure disproportionately benefits high-wealth individuals, who often pay lower effective tax rates compared to low- and middle-income taxpayers. This preferential treatment exacerbates economic disparities across various demographics, including gender, geography, race, and ethnicity.

Additionally, it encourages the wealthy to hold onto assets purely to avoid paying capital gains taxes, potentially stifling economic productivity.

The New Proposal

The proposed tax reform introduces a 25% minimum tax on total income, which includes unrealized capital gains, for individuals with wealth over $100 million.

This tax would apply regardless of whether the gains have been realized through the sale of assets.

The goal is to prevent the wealthiest Americans from paying disproportionately low taxes on their income and to reduce the incentives for holding onto assets solely for tax benefits.

Taxpayers could pay the first year of minimum tax liability in nine equal annual installments, with subsequent years allowing for five equal annual payments.

The tax would be calculated based on 25% of the sum of taxable income and unrealized gains, minus any previous prepayments and regular tax. To avoid double taxation, these prepayments would be credited against taxes due on realized capital gains.

Key Features of the Proposal

1. Wealth Reporting: Taxpayers exceeding the wealth threshold must report their total basis and estimated value of assets and liabilities to the IRS annually. This includes detailed reporting by asset class, with tradeable assets valued at market prices and non-tradable assets assessed using various conservative valuation methods.
2. Illiquidity Clause: Taxpayers with less than 20% of their wealth in tradeable assets may be considered “illiquid” and can elect to include only unrealized gains from tradeable assets in their minimum tax liability. However, a deferral charge, capped at 10%, would apply upon realization of gains on non-tradeable assets.
3. Regulatory Provisions: The Secretary of the Treasury would have the authority to issue regulations to implement and enforce the new tax, including measures to prevent the reclassification of assets to avoid the tax.

Implementation Timeline

The proposed minimum tax on the wealthiest Americans is set to take effect for taxable years beginning after December 31, 2024.

This change represents a significant shift in the U.S. tax system, aimed at creating a more equitable distribution of the tax burden and addressing long-standing economic inequalities.

If V.P. Harris is elected in November, it will be essential for high-net-worth individuals to stay informed and plan accordingly.

This new tax initiative signals a move towards greater scrutiny and taxation of wealth, with potential implications for investment strategies and wealth management.