What You Need to Know
- Schwab's DC representative Mike Townsend discusses his expectations.
- A 28% or 29% capital gains tax rate is possible for those earning more than $1 million vs. Biden's 39.6% rate.
- Not likely: a bipartisan infrastructure bill or an increase in the RMD age before this fall or 2022.
The Biden administration’s plan to hike the capital gains tax for those earning more than $1 million from 20% to 39.6% is not likely to pass Congress, according to Charles Schwab’s representative in Washington.
“Very few people think that [39.6%] will be the outcome,” said Mike Townsend, vice president for legislative and regulatory affairs at Charles Schwab Corp., who spoke about Biden’s legislative agenda on the company’s midyear market outlook webinar.
What is possible, however, is a capital gains tax hike to 28% or 29% — the “sweet spot,” said Townsend. Those earners would also be subject to the additional 3.8% Medicare surtax they already pay on capital gains.
Biden’s plan would raise the capital gains tax for those earning $1 million or more to the same rate they would pay on their income, which would increase from 37% to 39.6%, the rate that prevailed before the sweeping tax overhaul enacted in 2017.
Townsend was even more pessimistic about passage of Biden’s proposal to end the step-up in basis for inherited assets, which would be subject to capital gains tax at the time of death, rather than after the sale of assets. One million dollars would be exempt from taxes for individuals and $2 million for couples, plus another $250,000 for each for a home.
“It’s not at all clear that they can get that through Congress,” he said, adding that Congress could instead lower the current exemption from the estate tax, which has a maximum 40% rate. Under current law, the exemption is $11.7 million for individuals and $23.4 million for couples.
Townsend was equally pessimistic about any capital gains tax increases being retroactive to April 28, when Biden released the proposal. “That’s getting a lot of attention … but not a lot of support on Capitol Hill,” he explained.
He stressed that Biden’s capital gains tax proposals contained in his American Families Plan and his corporate tax proposals, included in his American Jobs Plan, are just proposals, which require congressional action to become law. That will take weeks during which the two plans could be combined into one bill or divided up into smaller bills, said Townsend.
“Congress will do the work and Congress will make changes along the way,” he said.
Townsend said bipartisan support for an infrastructure bill — Biden’s American Jobs Plan — “looks less and less likely.”
Although the administration and Republicans reportedly have moved closer on the size of a bill — near $1 trillion — they still differ widely on how to pay for the plan.