April 26, 2024

I’ve thought a lot lately about the difference between perception and reality – said differently, the way we think things are vs. the way things actually are. Social media is a great example. We see a photo posted from a friend’s vacation and are immediately jealous and wish we were there too. What isn’t seen in the picture of the kids in front of a beautiful sunshine are the following things: the 3 hour airport layover between flights, the 13 previous attempts to get both kids to smile and face the same direction, and the credit card debt taken on to finance the vacation. Just the smiling faces and setting sun (along with our own feelings of FOMO). Put differently, we’re often comparing the reality of our own lives to the reality others want us to see.

If you’re now wondering what the point of this diatribe about social media has to do with personal finance, I’m getting there.

President Biden recently released his new 2025 budget proposal, which includes a headline-grabbing figure of 44.6% for the top capital gains tax rate. Nearly 50%! Now that is a line that will catch your attention! Think of that headline as the sunset picture from your friend’s vacation I referenced above. It catches your attention but there’s more to the story.

The 44.6% rate is part of a proposal separate from the actual budget proposed by the President. It would only go into effect if two other budget proposals we approved. And if that were to happen, it would go into effect for a specific part of our population: those with annual income greater than $1,000,000 and investment income of more than $400,000 annually. So, if all the dominos fall in the right direction, it’s true a very small percentage of the population could see a higher tax rate for capital gains (the sale of an investment for a profit done outside of a qualified account, such as an IRA or 401(k)).

It should not be considered a surprise either, that the new budget proposal would seek a top tax bracket of 39.6% for those with income higher than $400,000/year. Nor is this a new objective of President Biden and members of the Democratic Party. In fact, the Biden administration has made little, if any progress on repealing the 2017 tax cuts put in place by President Trump’s administration – not that they haven’t tried.

Let’s go back to the earlier piece about perception vs. reality. President Biden has made no secret about his desire to for wealthier Americans to pay their “fair share.” However, his budget proposal is just that – a proposal. Any changes to the tax law must pass through both the House and Senate in Congress. The chances of Biden’s budget proposal passing without significant changes – slim at best. Republicans hold a 218-212 majority in the House (there are 5 seats currently vacant) and the Senate has 48 Democrats, 49 Republicans, and 3 Independents (who caucus with the Democratic Party). When it comes to tax law, it should be noted that Sens. Kyrsten Sinema (I-Ariz) and Joe Manchin (D-W.Va.) have voted against every attempt by the Biden administration to raise taxes, meaning this proposal (and those headlines) have a long, long way to go before becoming law.

Here’s what we can promise – as laws and rules change, we will continue to provide you with the highest level of service and understanding of what it means for you. Since opening our doors in 1969 we’ve found one of the greatest ways we can provide value is by cutting through the noise of the headlines into what matters most – the impact on you and your financial wellbeing.

Read the full General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals: https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf
 

Charles Wade, Senior Vice President - Financial Advisor

E-Mail: cwade@brightonsecurities.com

Direct: 585.340.2203

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