Biden TCJA

How Biden May Affect State Income Taxes & More


It's been a busy summer in terms of news, but among the major happenings, tax rule changes the Biden Administration is hoping to pass through Congress have become public knowledge. In the second of a three-part series, Julian Block addresses how the White House's wish list might affect surtaxes, state income taxes and more.

Jul 8th 2021
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First let's discuss, the income tax filing rules for profits from sales of personal residences. Second, profit-sale exclusions of as much as $500,000 for married couples filing jointly and $250,000 for those who file single returns or are married and file separate returns. Third is indexing.

Fourth, the tax rates of 15 percent and 20 percent for long-term capital gains that exceed the exclusion amounts. Fifth, the surtax of 3.8 percent on NII, short for net investment income, that applies to gains greater than the exclusion amounts.

What awaits you in part two is a discussion of President Biden’s wish lists. In particular, he wants Congress to approve changes in the tax laws that will help finance his legislative agendas.

Long-term capital gains? Mr. Biden thinks Congress ought to replace the present top rate of 20 percent for profits from sales of assets owned for more than one year with a new one of 39.6 percent––nearly twice today’s top.

The former long-time member of Congress is willing to cut it some slack, by making the new rate more politically palatable. He applies it to relatively few individuals––only to those with incomes above $1,000,000, dropping to $500,000 for couples filing separately. He’ll index it for inflation after 2022.

Assume his proposal becomes law. What’s in store for wealthy individuals with long-term capital gains? An attention-grabbing rate of 43.4 percent, the sum of 39.6 percent, plus that pesky 3.8 percent surtax on certain kinds of investment income (see part one).

The surtax? Mr. Biden is mum, so far. Presumably, he’s okay with a surtax that stays on the books and is stacked on top of the 39.6 percent rate.

State income taxes? Presumably, they’re also going to stick around and be stacked.

The state that imposes the highest levy? California’s 13.3 percent rate on capital gains. 

California taxes all capital gains as regular income. It doesn't distinguish between short-term and long-term capital gains. This means that a filer's capital gains taxes will run between 1 percent up to 13.3 percent, depending on the filer's overall income and corresponding California tax bracket.

To further twist the knife, the Tax Cuts and Jobs Act, the key legislative accomplishment of the present president’s immediate predecessor, severely restricts deductions for state and local taxes (see part one).

It imposes a $10,000 ceiling, dropping to $5,000 for married couples filing separate returns. The ceiling, often referred to as the SALT cap, applies to write-offs through 2025.

What’s ahead? Part three will focus on some more of Mr. Biden’s agenda for taxes. Among other things, sellers of inherited assets are in his crosshairs.

He wants Congress to curtail long-standing rules for “step-ups” authorized by Code Section 1014. Step-ups benefit sellers of inherited assets that have increased in value, such as homes, stocks, real estate and works of art.

Also in part three: whether Mr. Biden and Congress will be able to cut a deal. His proposals face hurdles that could prove insurmountable.

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