Disregard social media platforms. Let's delve into the implications of Harris' proposed unrealized capital gains tax for individual taxpayers.
Various posts disregard the truth that the plan primarily impacts individuals with a net worth exceeding $100 million, counting less than 1% of taxpayers, and spreads misinformation about a potential new hefty tax bill for all homeowners. A TikTok user, for instance, claimed that people will lose their homes and be financially ruined by the IRS.
The issue at hand involves a suggested policy often referred to as the billionaire minimum tax. This proposal would consider an increase in asset value – like real estate, stocks, and private businesses – as taxable income annually, even if these assets aren't sold. This is commonly known as an unrealized capital gain.
If you want to understand this better, you can consider it as a tax levied on a profit that exists only on paper.
As Mark Friedlich, vice president of government affairs at Wolters Kluwer Tax & Accounting, explained, "It's quite a transformational proposal."
During the election campaign, Harris voiced support for the billionaire minimum tax. While she hasn't specified the exact details, the Biden-Harris administration's recent budget proposal provides a clear outline.
The billionaire minimum tax is just one of many tax policies proposed by Democrats in recent times to target the wealthy. Both Biden and Harris have consistently advocated for the "wealthiest Americans to pay their fair share" of taxes. These additional revenue sources could potentially fund social programs, such as assisting families with childcare expenses or offering down-payment help for first-time homebuyers.
Currently, middle- and high-income earners pay a tax on realized capital gains, which is triggered when an asset is sold at a higher price than what the owner originally paid for it. Essentially, it's a tax on the profit. Harris has specifically called for raising the top tax rate on millionaires generating long-term realized capital gains from 20% to 28%.
Key points to keep in mind about how these tax changes could unfold:
Most taxpayers remain unaffected
The billionaire minimum tax on unrealized capital gains, as proposed by the latest Biden-Harris administration budget, affects taxpayers with net worth surpassing $100 million.
Less than 0.01% (approximately 20,209 taxpayers) had net worth valued at $50 million or more in 2019, according to the most recent IRS data available.
Recent data from Altrata, a private firm, suggests that the number of high-net-worth individuals has grown in the past 5 years. However, the percentage of all US taxpayers earning over $100 million remains small.
Harris' plan to raise the top tax rate on realized capital gains to 28% affects taxpayers with an annual income exceeding $1 million. In 2021, approximately 0.54% (875,500 taxpayers) reported having this income, according to the IRS.
Those impacted are categorized as "the smallest slice of the very wealthy" by Erica York, a senior economist and research director at the right-leaning Tax Foundation.
Implementation of a tax on unrealized capital gains
Let's discuss how a billionaire minimum tax – essentially a tax on unrealized capital gains – would affect homeowners.
As of now, homeowners pay a tax on the growth in property value when it's sold, or realized. However, a tax on unrealized capital gains would require homeowners to pay a tax on the increased value of their home annually, even if the house hasn't been sold.
For instance, if a house cost $500,000 and its value increases to $520,000 the next year, the owner would owe taxes on the $20,000 increase.
The tax also extends to other assets such as stocks and private businesses. However, the Biden-Harris administration's proposal would only impact those with a net worth above $100 million.
A common misconception pertains to how much wealthy taxpayers would owe. It wouldn't involve a new, separate tax bill.
Under the Biden-Harris administration's proposal, affected taxpayers would be required to pay a minimum effective tax rate of 25% on all of their income, including unrealized capital gains. If their effective tax rate on this recalculated income ended up below 25%, they would owe additional taxes.
Challenges involving implementation and legal issues
Implementing a tax on unrealized gains would pose significant challenges for the IRS. It would probably necessitate creating a method for measuring the annual change in value of a private business and real estate, which the agency currently doesn't track.
Mark Friedlich, vice president of government affairs at Wolters Kluwer Tax & Accounting, stated that, "This creates an enormous administrative burden on the IRS, as if it's not already challenged enough."
Adapting to this new challenge might compromise the agency's primary responsibilities, including timely return processing and customer service assistance. Potential solutions could ease this burden, depending on the proposal's details. For example, a 2021 proposal by Senate Finance Committee Chairman Ron Wyden wouldn't have taxed non-tradable assets like real estate or businesses annually.
Challenges in Congress
Even if Democrats secure control of both the House and Senate during a potential Harris presidency, passing the billionaire minimum tax or increasing the long-term capital gains tax rate could be challenging in Congress.
In 2021, Senators Manchin of West Virginia and Sinema of Arizona – both Democratic turncoats – hindered similar tax proposals from progressing.
If enacted, a billionaire minimum tax could potentially face numerous legal challenges.
Some individuals casting doubt on Democratic wealth tax plans argue that it's uncertain if these taxes would not eventually incline towards impacting middle-income families.
History has shown that governments have a habit of adjusting and altering taxes subsequent to their initial introduction. Take, for instance, the federal income tax, which has gradually encompassed more individuals over time. However, the influence of the estate tax has receded.
In line with Biden's ideologies, Harris has given no signs of intending to escalate taxes for people with an annual income below $400,000.
Another potential tax alteration could affect inheritances
Harris hasn't expressed her views explicitly on this matter, but Biden's financial plan contains a provision that could modify the tax proceedings for inherited assets.
At present, you're exempt from paying capital gains tax when you inherit properties, stocks, or businesses that have seen a value increase, due to a provision called "step-up in basis."
However, in line with Biden's proposal, some wealthy individuals might be required to pay this tax upon the transfer of an appreciated asset upon death. The line of thought here is that the step-up in basis predominantly benefits the affluent, whose wealth is generally associated with real estate and stocks. It currently spares some wealth from being taxed as it passes down from one family member to another.
Biden's proposition would only affect inheritances with an appreciated worth surpassing $5 million for individuals or $10 million for married couples. Assets donated to charity would also be excluded from the tax.
The billionaire minimum tax proposal, as discussed, primarily targets individuals with a net worth exceeding $100 million, representing less than 0.01% of taxpayers. Conversely, the misconception spread on social media suggests that this tax would financially ruin all homeowners with a potential new hefty tax bill.
The Biden-Harris administration's proposal for the billionaire minimum tax does not imply a separate tax bill for all homeowners, but rather a requirement for affected taxpayers to pay a minimum effective tax rate of 25% on their total income, including unrealized capital gains.
