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Will Taxes Rise for the Wealthy? What You Should Know

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

 

The latest major initiative from the White House—a package of social measures including universal pre-kindergarten, a national paid leave program, expanded childcare assistance, free community college and more, known as the American Families Plan—includes proposed tax increases on wealthier taxpayers.

The proposal would return the top individual tax rate to 39.6% after it was reduced to 37% in the 2017 Tax Cuts and Jobs Act, and would tax capital gains1 and dividend income at ordinary income tax rates for individuals earning more than $1 million. The proposal also includes changes to the estate tax, including ending the so-called “step-up in basis,” which adjusts the cost basis of inherited assets to the market value at the time of inheritance, rather than the previous owner’s original purchase price.

These tax proposals are not surprising—they were core elements of President Joe Biden’s tax plan during the 2020 presidential campaign.

It’s important to remember that what the White House is proposing is just that—a proposal. It is Congress that will have to take the White House’s proposed American Jobs Plan (the $2.25 trillion infrastructure plan Biden unveiled at the end of March) and the American Families Plan and turn them into one or more pieces of actual legislation. The drafting of those bills will take place over the next few months on Capitol Hill, a process that is likely to include a dozen or more committees in both the House and the Senate and countless strong personalities who have their own views about what should and should not be included in the bills. Expect that process to be messy and time-consuming, and there is a good chance that what emerges from that process looks very different from what the White House initially outlined.

Legislation that includes significant tax increases is unlikely to gain bipartisan support on Capitol Hill. Ultimately, then, whatever legislation emerges will need unanimous support from Senate Democrats to have any chance of passing—and it is far from clear that all Democrats will get on board with the tax increases the White House is proposing.

Our view is that the tax increase with the broadest support among Democrats, and therefore the best chance of being approved by Congress, is the increase in the top individual tax rate. While Democrats are generally supportive of paying for some of their key policy initiatives with tax increases on the wealthiest Americans, changes to the capital gains tax rate and/or the estate tax are not yet universally embraced among all Democrats on Capitol Hill. It is likely there will have to be considerable intra-party negotiations in the months ahead on these and other elements of the White House proposals. 

Importantly, there is little talk in Washington about making any tax increases passed in 2021 retroactive to the beginning of the year. The focus is on forward-looking tax increases that would take effect in January 2022. That means taxpayers are likely to have some time to digest any tax code changes and consider what, if any, strategies are appropriate for their situation prior to any new tax rules going into effect.

For insight on how to potentially manage capital gains tax changes, should they become law, check out “4 Tips for Handling a Potential Capital Gains Tax Change.”

 

 

1 In 2021, capital gains tax rates are based on the following income thresholds: 0% for single filers with taxable income up to $40,400 ($80,800 for married filing jointly); 15% for single filers with taxable income of $40,401 to $445,850 ($80,801 to $501,600 for married filing jointly); and 20% for single filers with taxable income over  $445,850 (over $501,600 for married filing jointly).

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Important Disclosures:

The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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