May 19, 2021
During his Presidential campaign, candidate Joe Biden often promised to tax the wealthy and pledged that no one earning more than $400,000 would see his or her taxes increased. But members of President Biden’s Administration have recently clarified that the $400,000 threshold would apply to household income and not just individuals.
Candidate Biden also pledged to tax the wealthy on the increase in the value of their assets such as stock or real estate — the unrealized gain — of whether they have sold these assets. So it is easy to see how President Biden’s proposed tax increases will hit – and hurt – a great many middle-income families.
An example: John and Mary Green have been married for 40 years and have decided to retire. They have owned and operated a popular flower shop during their marriage and this business has provided them an annual income of $400,000. They have now found someone who is offering to buy their business for $1.2 million. The sale price plus their usual annual income of $400,000 will bring John and Mary Green’s total annual income to $1.6 million.
President Biden wants a new top rate of 39.6% on households where the combined income is over $400,000. The Greens’ total proceeds from the sale of their business — $1.2 million — is above $400,000 and would be subject to the proposed new 39.6% rate for a tax of $475,000. The Biden Administration would also impose an additional 12.4% payroll tax against the $1.2 million for an additional tax of $148,800.
John and Mary’s decision to retire will require them to pay $520,000 in federal taxes on their additional income ($1.2 million) over $400,000, plus any additional state
and local taxes that are applicable.
The Greens can hardly be called wealthy. They never had a combined annual income over $400,000. But selling their lifetime business would mean that the Greens will have to pay $160,471 more in taxes under the Biden Administration’s proposal than they would pay under current law.
But that is only the start. Thirty years ago, the Greens purchased shares of a new company called Apple for $5,000. Today their stock is worth over $500,000, which is earmarked for their retirement. The Greens also bought several works of art from a local artist years ago for $5,000. Based on an appraisal, the art is now worth $30,000. They also bought a few acres of land for $30,000, and the land is now appraised at $75,000. The Greens have not sold any of these assets, but each of these investments will be subject to Biden’s new tax on the unrealized gains on stocks, land, and other investments.
There have been suggestions from the Biden Administration that the new tax on unrealized capital gains would apply only to households with income over $1 million. However, the Greens would be considered wealthy for the year of the sale of their business and, therefore, subject to the capital gains tax on the total unrealized gains on their assets. The rate of the tax would be 39.6%. The combined gains on the Green’s assets — Apple stock, works of art, and land — would be $565,000. The tax on that unrealized gain will be $223,740. Compare that to current law which does not impose taxes until the assets are sold and then at a rate of 20%.
It is an open question whether the current net investment income tax of 3.8% would also be added to the tax on unrealized capital gains. It likely will fall on realized capital gains, making the total tax on capital gains income, whether realized or unrealized, 43.4%. The 3.8% surtax is supposed to be imposed only on the wealthy, but it would also
hit the Greens.
Here is the bottom line. The Greens will become millionaires for one year when they sell their flower shop. The federal tax under the proposed Biden Administration proposal would be at least $520,000 in income taxes and $223,740 in capital gains taxes for a total tax bill of $743,740. The 3.8% surtax would add an additional $21,470 to that bill.
It’s easy to envision that the Greens may have to reconsider retirement and the sale of their flower shop if these new tax proposals become law. The 39.6% tax on the investments that they have not cashed in would dramatically reduce the resources which they have worked hard to set aside. The Greens – and families like them – must let
Congress know that President Biden’s proposed tax increases on the wealthy will impact a broad range of people who are, in fact, not wealthy.