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Financial Planning > Tax Planning

Capital Gains Tax Rate Set at 25% in House Democrats’ Plan

By Laura Davison, Ally Chen and Erik Wasson

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What You Need to Know

  • That's far short of the 39.6% rate that President Biden had proposed.
  • The new rate would apply to those in the top tax bracket for long-term capital gains.
  • The plan also leaves intact the step-up in basis for assets at death.

House Democrats presented a smaller-scale overhaul of the way investments are taxed than President Joe Biden proposed earlier this year, highlighting the political challenge in enacting higher levies ahead of next year’s midterm elections.

The plan, released by the House Ways and Means Committee Monday, sets the top rate for taxing capital gains — money earned from the sale of assets such as stocks or property — at 25%, up from 20% under current law. Including a 3.8% Medicare surtax on high earners, the top capital gains rate would be 28.8%, taking effect in tax years ending after Sept. 13, 2021.

House Panel to Vote on Backdoor Roth IRA Curbs, RMD Hike for Wealthy

IRAs

That’s far short of the 39.6% rate — or 43.4% including the surtax — Biden proposed for those earning $1 million or more.

The new rate would apply to those in the top tax bracket for long-term capital gains, which in 2021 covers individual filers earning more than $445,850 and married joint filers earning more than $501,600, according to the Ways and Means Committee.

The changes are a component of measures designed to help pay for a major expansion in spending on social programs — the bulk of Biden’s longer-term economic plan. That broader legislative package, outlined at $3.5 trillion, will require unity in the Senate Democratic caucus to get enacted via a special fast-track process, given universal Republican opposition.

Inheritance Transfers

The draft text released Monday also leaves out a Biden proposal to end the “step-up in basis” treatment for assets passing from a deceased individual to an heir. Biden’s plan would have taxed those assets before they were inherited, but several Democrats had said they worried the change would pose hardships for family-owned businesses and farms as heirs would need to stump up cash to pay the tax.

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