Wealth taxes continue to be a political hot potato, 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.
“Wealthy clients should pay close attention to what is happening within the state they reside, where it may be more realistic to get the broad support needed to move the idea forward,” Preus said. Increased taxes on homes over a certain value, for example, are a popular target. Expanding that type of tax to other assets—investments, businesses, other real estate—may not be a huge leap, he said.
Details are key with state-level wealth taxes. “With the passage of the Massachusetts millionaire’s tax, folks earning in excess of $1 million of taxable income pay an additional 4% income tax on that excess,” Pantekidis said. “However, they also passed a state charitable deduction on certain types of income, as one example of an opportunity to reduce taxes.”
Wealth taxes are “certainly an unfair tax in my opinion, as most pay taxes throughout their entire lives only to be taxed again at death,” Primeau said. “Some amount of wealth will likely be exempt from the tax and, if the step-up in basis provision remains in place, they will be able to shelter some of their wealth from estate and income taxes.”
“This is a very broad topic that has garnered lots of media attention – for good reason – but it is too early to tell whether a typical wealth tax will ever be passed in the United States,” Pantekidis added. “We believe the cons definitely outweigh the pros and there are better, more efficient, ways to raise government revenue.”