March 26, 2024

The day of reckoning for America’s ultra-rich

The Biden Administration is set to outline a number of key changes affecting the wealthy and the taxes they pay.

Much of the headlines have been concerned about the USD $400,000 floor for additional taxes; but a highly overlooked element are possible taxes on America’s super-rich, whose fortunes start in the tens of millions of dollars; and who often pay lower tax rates than many middle-class families.

The Biden Administration, in conjunction with members of Congress such as Bernie Sanders, has indicated that there are plans to end the long list of obscure deductions, exclusions and loopholes that are the favorites of the 0.1%.

Two groups are effected. The first being made up of high-earning professionals and executives who have relatively few ways to avoid the top American federal tax rate of 37%. When State taxes are added, in some cases the marginal rate rises to 50%. This could rise further still if the Trump tax cuts are reversed and the top marginal rate returns back to 39.6%

In order to get the changes through Congress, the Biden Administration may remove the USD $10,000 limit on state and local tax (SALT); again brought in by the former administration.

These changes, however will pale in comparison to the second group of America’s wealthy taxpayers – those living not via income but rather off their investments.

This group pays the lower rate on capital gains and dividends, which is currently set at 23.8%. Typically, such taxpayers may have an effective federal tax rate between 20-22%, and those with real estate holdings even less.

Here is where the expected tax hike is to occur; bringing these rates in-line with ordinary income tax levels for those earning USD $1 million or more.

One idea being floated is to end a rule called “stepped-up basis,” which allows any taxable gains on assets to be wiped away at death. The rule allows the wealthy and their heirs to completely avoid taxes. Such a change would transform how the very wealthy manage their portfolios; causing many to foregoing highly appreciated assets as long as possible.

Additionally, a bill being floated by Senator Bernie Sanders would eliminate dynasty trusts; vehicles designed without an expiration date, which are used to pass fortunes not just to children and grandchildren but future unborn generations as well. The effect would be to un-do or complicate decades of planning by America’s wealthiest families.

As the progressive ‘revolution’ continues, America’s rich are in for a very rough ride.