The hits just keep on coming! The tax hits, that is.
Last month, President Biden pushed for a sharp increase in the capital gains tax rate, which sent the stock market into a tailspin that lasted all of about 3 hours. In case you missed it, the S&P 500 quickly recovered to notch all-time highs in the days following. No big deal.
What is a potentially big deal, or at least a significant one, is what indeed happens with the tax rate you and I pay on our capital gains. It’s doubtful that the rate would double to 39.6%, as the President proposed. That is just a launching pad for a negotiation on the topic. Maybe it falls somewhere in the middle of the 15% to 39.6% range.
The American Families Plan
It’s all to help fund the massive 8-year “human” infrastructure bill that Biden detailed in his address to Congress last week. The “American Families Plan” includes many programs that would benefit working families but negatively impact wealthy individuals and many business owners.
Stay Cool
From a personal finance perspective, planning for these kinds of big government programs and potential tax increases is always tricky because nobody knows what will ultimately be passed into law. Making rash decisions right now is not the best move. Instead, carefully considering your situation, then making probabilistic decisions from there is rational.
So don’t panic or get excited. Let’s give it time to see what legislation makes it through Congress and to the President’s desk. We’ll have time to make our financial planning changes if need be.
What all is in the plan American Families Plan, and what other items are in the tax hike proposal? Let’s peek under the hood.
The Spending Package
The $1.75 trillion American Families Plan is focused on education and worker benefits. This massive spending bill comes on top of the $2.3 trillion “American Jobs Plan” and the $1.9 trillion “American Rescue Plan.”
All told, more than $6 trillion of spending will have been injected into the US economy since last March. It’s hard to wrap your head around. The new plan would extend The Child Tax Credit, Earned Income Tax Credit, and provide funding for healthcare, child care, and family and medical paid leave. Another benefit to families is that individuals would be able to enroll in two years of community college for free. These benefits would likely apply only to those under certain income limits.
Tax Changes?
As for taxes, the White House aims to raise the top marginal tax rate to 39.7% from 37% and increase the capital gains tax rate for those making $1 million or more from 20% to 39.6% (making capital gains taxed the same as regular income for those high-earners).
Most investors pay 15% on long-term capital gains, while short-term capital gains (stocks bought then sold at a profit within a window of 1 year or less) are taxed at your marginal income tax rate. Another important piece of the plan would be eliminating a “stepped-up basis” for high-income earners – that could be a significant change. Other possible wealth transfer changes could come down the pike. Those changes could be significant for wealthy families looking to maximize generational wealth, so we’ll have to see what shakes out.
American Families Plan Cost Breakdown
Taking a step back, this bill would require the support of all 50 Democratic senators, some of whom don’t think the bill goes far enough. The more-centrist Democrats, like Joe Manchin, are uncomfortable with yet another multi-trillion spending proposal. To say there is uncertainty on if this bill gets passed is an understatement. Perhaps pieces of it get through, but nobody has a confident guess yet. We should know more by late this year.
The Point
You know the point. Focus on your situation, and we’ll keep tabs on the latest developments in DC. We knew proposals like this would be on the way when the “blue wave” rolled through earlier this year. The Democratic majority in the Senate is slim, though, so the President and Majority Leader Schumer have to thread the needle to make significant changes. Meanwhile, the debt keeps soaring (but we’ll leave that topic for another week!)
We’ll talk soon!