Capital gains tax increase: what does it mean for your money?

1 min readLast updated June 4, 2024by Rachel Carey

This article takes you through what you need to know about how to deal with potential capital gains tax increases and what they could mean for your money.

Summary 

  • The proposed capital gains tax increases would bring the top rate of long-term capital gains tax to 39.6% or 44.6%, including qualified dividends.  

  • President Biden’s $7.4 trillion 2025 fiscal year budget proposes several tax increases, including one on capital gains taxes.  

  • If approved by Congress, the budget measures would come into effect in 2024; however, this seems unlikely.  

  • When dealing with taxes, it’s wise to get expert advice. A financial advisor can help you develop the right tax strategy for your money.  

What are the proposed capital gains tax increases? 

One of the biggest talking points from President Biden’s fiscal year (FY) 2025 budget is the proposed changes to capital gains tax.  

The proposals would increase the top rate of long-term capital gains tax to 39.6%.  

However, according to the General Explanations of the Administration’s FY 2025 Revenue Proposals, for some taxpayers, when adding several proposals together, they could qualify for a top marginal rate on long-term capital gains and qualified dividends of 44.6%. 

This would be the highest federal capital gains tax rate since 1922.  

The current rate top rate for long-term capital gains tax is 20%. However, it’s important to remember, as noted by Forbes, that many long-term capital gains are also subject to the net investment income tax of 3.8%. 

This brings the current overall top rate individuals could pay to 23.8%.  

The above numbers also do not include average state and local income tax rates, which could push these numbers even higher.  

Alongside capital gain tax changes, the budget also outlined higher taxes for businesses and individuals, including an increase to the top federal tax rate, a Medicare tax hike, and a new billionaire tax.  

All the proposed changes indicate a gross tax hike of about $5.3 trillion from 2024 to 2034 – the period the budget covers. 

According to experts at Tax Foundation, on a gross basis, they estimate the budget would increase taxes by about $4.4 trillion over the same period. 

When will the capital gains tax increase happen? 

As mentioned, the proposed capital gain tax increases are part of President Biden’s budget for the 2025 fiscal year, which starts in October 2024.  

While the budget covers a 10-year period from 2025 through 2034, the proposed tax increases would come into effect in 2024 – if approved by Congress.  

The $7.3 trillion budget proposes allocating $4.3 trillion for mandatory spending programs – Social Security, Medicare, and Medicaid – and $1.6 trillion for discretionary expenses. 

Discretionary expenses include $895 billion for defense and $770 billion for non-defense spending and emergency funds. 

To afford this spending, President Biden is proposing significant tax increases for corporations and high earners, including the capital gains tax increase.  

However, it’s important to note, according to many experts, the measures proposed in the budget are unlikely to be approved by Congress and become law due to Congressional divides and the upcoming election.  

How will a capital gain tax increase affect me? 

The proposed capital gains tax increase would apply to investors who make at least $1 million a year.  

According to Tax Foundation, if you fall into that bracket, you will go from paying a top combined marginal tax rate of 29.1% to 49.9%. 

These figures take the top capital gains tax rate, the net investment income tax (NIIT) rate, and state and local tax rates into account.  

For some individuals in specific states, this increase goes even further, breaching 50%.  

According to Newsweek, people living in California, New Jersey, Oregon, Minnesota, and New York will pay over 50% in capital gains tax once the state’s added-on capital gains tax is included: 

  • California – 59%  

  • New Jersey – 55.3% 

  • Oregon – 54.5% 

  • Minnesota – 54.4%  

  • New York – 53.4%  

Biden’s budget also eliminates the tax loophole that allows Americans to pass on assets to their beneficiaries to avoid paying taxes.  

How can I avoid a capital gains tax increase? 

According to many experts, the changes proposed in President Biden’s budget are unlikely to take effect as Congress is unlikely to approve them.  

However, with an election on the horizon, it’s worth considering how you would approach any capital gains tax increases that could come your way.  

One of the most common areas where people pay capital gains tax is during property sales. There are ways to avoid capital gains tax charges from the sale of your home.  

One way is to increase the purchase price or “basis.” 

This can be done by adding certain capital improvements made to the property to “add to the value of your home, prolong its useful life, or adapt it to new uses.” As this increases the basis, it means your capital gains is reduced.  

If your capital gains tax is incurred through other means, it’s wise to speak to a tax professional who can provide personalized advice on how you can legally avoid tax.  

Get expert financial advice 

Understanding your capital gains tax and how any potential increases may impact you is key to ensuring you pay the right amount of tax – no more or less than you have to.   

It's always wise to seek expert advice to make informed decisions tailored to your unique circumstances and goals. A financial advisor can help you develop a tax strategy that will align with your long-term financial goals.  

Let Unbiased match you with an SEC-regulated financial advisor 

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.