There’s a question on the U.S. Government’s mind: Are millionaires and billionaires paying their fair share of taxes?
President Biden is proposing policy changes with an FY 2025 budget, and if approved, the wealthier may face steeper tax rates. Will any of these changes affect you? According to our military financial professionals at AAFMAA Wealth Management & Trust LLC (AWM&T), here’s what you should know about a potential impact on your finances.
Why Focus on the Wealthy?
Many of the proposed tax law changes are designed to increase taxes on those currently paying lower rates than most Americans. One key reason this happens is that investment income is taxed at lower rates than earned income (wages and salaries), the main income source for those in lower- and middle-income tax brackets.
Proposed 2025 Tax Changes
If President Biden’s FY 2025 budget proposal is approved by Congress, you can expect to see these key elements:
- Minimum tax on billionaires. For households with a net worth of over $100 million, the average tax rate will increase from 8.2% to a minimum of 25%.
- Capital gains tax will double. Capital gains are earnings from the sale of assets (for example, stocks and real estate). Currently, the long-term capital gains tax rate ranges from 0% to 20%, but it is proposed to jump to a maximum of 39.6% for those with more than $1 million in income.
- Limiting Step-up in Basis. If you die with unrealized capital gains on your investments, those investments can pass to your heirs tax-free because their cost basis is adjusted on the inherited assets to the fair market value at the time of death. This budget proposal will eliminate the step-up for gains exceeding $5 million per person and $10 million per married couple.
- Medicare tax increase. Those earning over $400,000 annually (through wages, salaries, tips, and capital gains) may face a Medicare tax increase from 3.8% to 5%.
- Carried interest loophole. Asset managers can treat certain compensation as capital gains but under the new proposal, that compensation will be treated and taxed at the standard income rate, which is a higher percentage.
AWM&T Remains Vigilant for You
As always, you can count on AWM&T to pay close attention to the ever-changing investment landscape and manage your assets accordingly. Since President Biden’s proposed budget is not likely to gain Congressional support to pass this year, we encourage you to ignore the noise and breathe easy, knowing you have a trusted financial partner with AWM&T. Our team of seasoned professionals operates to a fiduciary standard and continues to look out for your best interests. Count on us to update you with pertinent changes that may affect your financial picture. Until then, if you have any questions, please contact your AWM&T Relationship Manager or call us at 910-307-3500.
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