Tax Increases in Proposed 2025 Budget

There has been a lot of scuttlebutt as of late regarding the current administration’s 2025 federal budget proposals, including some major changes to how Americans are taxed on their investments. There are a few major components of these tax changes. Here are the facts, and what investors should pay attention to as we move toward 2025.

What Is the Administration Trying to Accomplish?

The US Federal government is running a massive budget deficit each year with unprecedented federal debt. The tax increases proposed are an attempt to generate additional federal tax revenue, specifically targeting higher income earners and wealthy asset holders to pay for government expenditures. By targeting realized and unrealized capital gains, their goal is to have a reduced impact on middle- and lower-income taxpayers.

In wake of the coming sunset of the TCJA at the end of 2025, lawmakers will feel the urge to act promptly once the election cycle is over. By getting proposals out in the open now, there could be more time to digest components that may or may not have a chance at sticking a few months down the road. Below are some components of the proposed 2025 budget.

Major Tax Policy Changes

Increase top individual income tax rate to 39.6% on income above $400,000 for single filers and $450,000 for joint filers (effective 2024)
Increase the corporate income tax rate from 21% to 28% (effective 2024)
Limit retirement account contributions for high-income taxpayers with large individual retirement account (IRA) balances
Tax long-term capital gains and qualified dividends at ordinary income tax rates for taxable income above $1 million. The top marginal rate will hit 44.6%.
Tax unrealized capital gains at death above a $5 million exemption ($10 million for joint filers) and tighten rules related to the estate tax
Add tax credits for housing, specifically targeting lower income taxpayers
Extend the Child Tax Credit

Conclusion

These tax increases will provide additional revenue to federal coffers in the short term; however, long term results are impossible to know and could contribute to reduced business investment and increased offshoring of assets in an attempt to circumvent new tax policy changes.

It is important to note that the budget proposals made by an administration are often a “wish list” of policy changes that often get “watered down” as the budget makes its way through Congress. So, while some of these changes will make taxpayers anxious of the future, it is likely not many will pass through the budget process in their current form. However, it is worth noting these proposals are a vision of what the current administration is focusing on as they pursue a second term in office.

Clients should continue to focus on what they can control within their own budgets and businesses, and that means continuing to work with financial advisors, tax advisors and estate planners to ensure their financial plans are up to date and aligned with any new tax plans enacted.

Source: https://taxfoundation.org/research/all/federal/biden-budget-2025-tax-proposals