Wealth taxes continue to be a political hot potatoe, with proposals being pushed on the national and state levels and the U.S. Supreme Court expected to soon rule on whether such levies are constitutional.
Advisors say clients should be aware of the implications of wealth taxes since the idea continues to gain momentum in Washington, D.C., and some states.
“Wealth taxes have continuously been discussed by the federal government and multiple states in the past, and each proposal has its own nuances,” said John Pantekidis, managing partner and general counsel at wealth advisory firm TwinFocus in Boston. “California recently proposed taxing the richest [state] tax residents 1% to 1.5% each year on their wealth, in addition to their sizable income taxes. The New York proposal had a different twist: taxing unrealized gains as of the close of each year regardless of whether any assets have sold.”
Pantekidis added that the Biden administration introduced a series of taxes aimed at “soaking” the wealthiest Americans with additional taxes: a minimum annual income tax of 25% for households with net worth exceeding $100 million.
U.S. Senate Finance Committee Chairman Ron Wyden of Oregon also recently joined 15 other Democratic senators in introducing the Billionaires Income Tax Act, which is designed to close tax loopholes for the ultra-wealthy.
Among other measures, the act would curtail “buy, borrow, die,” a tactic by which the uber-wealthy buy assets that appreciate, borrow against that asset’s growing, untaxed value and then pass on the assets to heirs, often tax-free. The proposal would apply to taxpayers with more than $1 billion in assets or more than $100 million in income for three consecutive years. Billionaires’ tradable assets, such as stocks that can be valued annually, would be marked to market each year and the gains or losses calculated for tax purposes.
“It would hit the wealthy hard because it proposes to tax assets rather than income or realized capital gains,” said Erik Preus, head of investment solutions at Envestnet PMC in Minneapolis. “Wealthy clients suggest this will have a very negative affect on them personally and unintended consequences on the economy [by incentivizing] investors to sell assets that otherwise wouldn’t be sold, or perhaps look for new avenues to shelter assets.”
A wealth tax can take many forms. Bruce Primeau, financial planning consultant at Summit Wealth Advocates in Prior Lake, Minn., said the 2025 sunset of many provisions of the Tax Cuts and Jobs Act, though not a direct wealth tax, should also be on clients’ radar. “What will the personal exemption amount be effective Jan. 1, 2026?” he said. “Will the step-up in basis at date of death still [be] in place?”
A wealth tax concept at the federal level does not seem to have the broad support needed to gain traction in a divided government, but a case now before the Supreme Court could curtail efforts to ever create one.
In Moore v. the United States, the plaintiffs argue that taxing unrealized income is unconstitutional. The case, initiated by a Washington couple who sued over owing $15,000 because of the mandatory repatriation tax on foreign assets, is viewed as a constitutional test for wealth taxes. But based on the comments of Supreme Court justices during oral arguments earlier this month, the early indications are that the court is not inclined to invalidate the repatriation tax, court watchers say.
