Terry Herr, CFP®, CLU
Several U.S. senators have proposed new legislation in an effort to raise $3 trillion in tax revenue over the next decade.1 Called the Ultra-Millionaire Tax, this new proposed legislation comes in direct response to the economic turmoil Americans have experienced throughout the COVID-19 pandemic.
Senator Elizabeth Warren described the necessity for such revenue saying, “As Congress develops additional plans to help our economy, the wealth tax should be at the top of the list to help pay for these plans because of the huge amounts of revenue it would generate.”1
The majority of Americans would not see a direct impact from this proposed wealth tax. But for those it would affect, this could greatly increase their tax obligation in the future. Of course, the concern is that the tax thresholds may gradually be reduced and impact those of more modest wealth. Here’s what you should know about this tax proposal.
What Is Being Proposed?
Several senators proposed the Ultra-Millionaire Tax Act on March 1, 2021. This tax legislation would impact 100,000 households, or those considered to be in the top 0.05 percent of wealth earners in America.1 More specifically, the Ultra-Millionaire Tax Act is a wealth tax that would affect those with a net worth of $50 million or more.
Affected ultra-high-net-worth families would be taxed as follows:
- Two percent annual tax for those with a net worth of $50 million to $1 billion.
- Three percent annual tax (two percent plus one percent surtax) for those with a net worth of $1 billion or more.
What Is a Wealth Tax?
With income tax, the individual is taxed on how much they made during the previous year in taxable income (such as a salary, retirement account withdrawals, interest, etc.). Wealth tax, on the other hand, is an annual tax that is applied toward an individual’s actual net worth - as opposed to the income earned over that year.
Do Wealth Taxes Currently Exist?
Several states have proposed wealth taxes in the past. In 2020, California introduced a wealth tax for residents (and former eligible residents) with a net worth of $30 million or more. The proposed legislation, however, has not moved forward.
Several states currently have a “millionaire tax” implemented, but it is based on an individual or family's taxable yearly income, not net worth.
What Should High-Net-Worth Families Do to Prepare?
Learning that you may be faced with an additional tax burden never feels good. But the reality is, there’s no guarantee of when, or if, this proposed legislation will be passed into law. There is also some question as to the constitutionality of the proposed wealth tax. As with any current or proposed tax, it is important to be aware of the potential impact as well as ways to mitigate any potential liability.
Those concerned about the any tax obligations should work with us and their tax professional. The benefits of a team of financial and tax professionals working together is that they understand the tax laws and may be able to help you legally avoid or defer taxation. Often new tax laws create new avoidance measures as well.
Advance annual preparation with Herr Capital Management and your tax advisor should help ease current and potential tax burdens. Contact Us to discuss your current financial situation.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.