What Is a Wealth Tax -- And What Would It Mean for You?

The wealth tax has been making news lately.

It's a core element of Sen. Elizabeth Warren's tax policy, with her proposal to tax assets of $50 million or more at 2% and assets of $1 billion or more at 3%.

Sen. Bernie Sanders recently released his version of a wealth tax. His "tax on extreme wealth" would tax 1% of wealth of more than $32 million for married couples, then increase the tax to 2% for wealth between $50 million and $250 million and continue to increase incrementally before topping out at 8% for wealth of more than $10 billion.

Proponents of a wealth tax see it as a way to reduce economic inequality, address the climate crisis and boost the economy. In fact, a group of ultrawealthy Americans penned an open letter this summer asking to be taxed on their wealth to strengthen the U.S. economy.

Critics of the wealth tax say it will be impossible -- or even unconstitutional -- to enforce, would stall economic growth and job creation, and may even encourage multimillionaires to move money abroad.

But while pundits debate the large-scale consequences of a wealth tax, regular taxpayers may be wondering what impact a wealth tax would have on their own tax-filing situations. The answer: "The vast majority of Americans will not be affected by this," says Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center.

After all, unless you're extremely rich -- well beyond ready-for-retirement rich -- you wouldn't have enough assets to be counted for this tax, according to current proposals.

Want to learn more? Here's what to know about a wealth tax, what it is and how you should prepare for it.

[Read: Fight Back: How to Combat Racial Wealth Inequality]

What's a Wealth Tax?

A wealth tax, like those proposed by Warren and Sanders, would require the ultrawealthy (the country's 75,000 richest households, according to Warren's plan, or the 180,000 wealthiest, according to Sanders') to pay an annual tax on the assets they hold, which may include property, business interests, investments, yachts, fine art and other possessions.

Most taxpayers are accustomed to paying taxes on income, such as wages, each year. But a wealth tax would focus on assets, regardless of whether they're sold, traded or earn a dividend. Wealth, in other words, is what you'd have if you could sell everything you own right now, says Harlan Levinson, a certified public accountant based in Beverly Hills, California.

There are lots of individuals with high income and little wealth. Think of a professional football player or celebrity who signs massive contracts but spends as fast as they earn. But there are also citizens with outsized wealth but minimal income. Consider Jeff Bezos, who reportedly takes home a salary of less than $100,000 each year, but whose wealth tops $100 billion.

[See: 15 Tax Questions -- Answered.]

If you're looking for a tax in the same vein as a wealth tax, you can compare it to the property taxes you pay to your local government on the value of your home each year.

For a more comprehensive type of wealth tax, consider the federal estate tax. It's only levied once in a lifetime -- when the taxpayer dies -- and only impacts Americans with estates topping $11.4 million in 2019. The federal estate tax, which maxes out at 40%, requires tallying up the fair market value of the items a taxpayer owned, including cash, real estate, insurance, business interests and other wealth, and can provide some hints as to how assets might be valued and accounted for under a wealth tax.

Additionally, other countries have experimented with different versions of a wealth tax, with many deciding to eventually scrap theirs. Today, three European countries continue to levy wealth taxes, including Norway, Spain and Sweden. France ditched its wealth tax in 2018.

It could be a costly and complex system to implement. But, again, unless you're super rich, it won't impact you on Tax Day.

[See: 9 Red Flags That Could Trigger a Tax Audit.]

Will I Have to Pay a Wealth Tax?

Probably not. Unless you have tens of millions of dollars in assets, you won't be impacted by the wealth tax, according to Warren's and Sanders' specific policy proposals.

While you may want to consider the broader ways all Americans would be affected by the economic impact of a wealth tax, this specific policy idea won't change the way the vast majority of Americans file taxes, account for their business interests or appraise their art collections. So unless you have the enviable problem of being extremely rich, breathe easy.

If you do hold more than $32 million or $50 million in wealth, the passage of a wealth tax would impact your annual taxpaying experience. In theory, you'd work with tax professionals and government officials to value your disparate assets and come up with a figure to be taxed at the corresponding rate. If you're clever, you may find workarounds, such as the savvy use of charitable foundations and other financial vehicles, to mask wealth and reduce the amount owed.

Keep in mind, too, that the wealth tax is a long way from becoming a reality, with the Democratic primary and 2020 election still on the horizon. "I never make tax-planning decisions based on proposed legislation," says Lawrence Pon, a tax specialist who owns an accounting firm in San Francisco. "There's a lot of proposed legislation out there, and a lot of it never happens."