With the upcoming election, the focus is on the impact that proposed capital gains taxes could have on investors. Vice President Kamala Harris recently proposed a 28% tax on long-term capital gains for individuals earning over $1 million annually, raising the current top rate of 20%. Senator Bernie Sanders, on the other hand, has shown support for an even higher tax rate. This raises concerns among investors about the potential impact on their assets.
Harris’ proposal for a 28% capital gains tax contrasts with President Joe Biden’s 2025 fiscal year budget, which calls for a 39.6% tax rate for those earning above $1 million annually. Additionally, Harris plans to raise the net investment income tax (NIIT) from 3.8% to 5%, whereas Biden’s budget includes the same increase for individuals with modified adjusted gross income (MAGI) over $400,000. This presents a significant difference in tax rates for top earners, with the potential of reaching a combined rate of 33% under Harris’ plan and 44.6% under Biden’s proposal.
Former President Donald Trump, known for his support of tax cuts, has not outlined a specific proposal regarding capital gains taxes. However, his administration has shown broader support for tax cuts in general. The Heritage Foundation’s “Project 2025” proposed a 15% tax rate for capital gains and dividends, aiming to abolish the NIIT as well. Despite some of Trump’s officials being associated with the project, he has distanced himself from the plan, leaving uncertainty about his stance on capital gains taxes.
Over the years, capital gains tax rates have generally been lower than ordinary income tax rates, providing preferential treatment to investment earnings. Harris’ proposed 33% combined capital gains tax rate for top earners would be the highest since 1978, while her 28% top rate (excluding NIIT) would match the rate set by Ronald Reagan in 1986. The Tax Policy Center highlights how tax rates have fluctuated over time, with the lowest rate of 15% during George W. Bush’s presidency. However, revenue from capital gains can be volatile due to the timing of investments and profits realized, leading to uncertainty in revenue estimates for tax proposals.
Investors have the flexibility to choose when to sell assets and incur capital gains taxes. Higher tax rates can incentivize them to defer sales or strategically realize gains in lower tax brackets. With the current rates ranging from 0% to 20% for capital gains, plus the additional NIIT for higher earners, there is a potential “lock-in” effect associated with capital gains. As the tax rates fluctuate, investors may adjust their strategies to optimize their tax liabilities.
The proposed changes in capital gains taxes by different political parties raise concerns and uncertainties for investors. The varying tax rates and proposals could have significant implications for individuals earning high incomes and those with substantial investment portfolios. As the election unfolds, it will be crucial for investors to stay informed and adapt their financial plans accordingly to navigate the changing landscape of capital gains taxes.
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