President Joe Biden outlined his tax proposals in his address to Congress on April 28th and issued an 18-page fact sheet, which can be found by clicking here.
There are many proposals, but here are some of the items of note for individual investors:
- The top tax bracket would increase to 39.6 percent from 37.0 percent. In 2021, the top bracket began at $523,601 for single individuals and $628,301 for those married filing jointly.
- The capital gains rate for ‘households making over $1 million’ would increase to 39.6 percent, essentially turning capital gains into ordinary income for those households, instead of the current 20 percent. It appears that qualified dividends for these households would also be taxed at 39.6 percent.
- The ‘step-up’ in cost basis at death would end for amounts over $1 million (and up to $2.5 million for some households).
- In-kind exchanged for real estate would be cut back with the elimination of Section 1031 on gains more than $500,000.
So far, the proposals are being discussed for 2022, and won’t likely be retroactive to the start of this year, although never say never with the government.
At this point, it’s useful knowing what might happen, but it’s also too early to do too much with this information since not all of Biden’s proposals will become law.
Some people are considering ‘tax gain’ harvesting, which sounds fancy, but is pretty straight forward. For filers that may face the top ordinary bracket for long-term capital gains, tax-gain harvesting simply means selling now and paying at the current rate of 20 percent. One of the big risks is that the tax is retroactive, even though that doesn’t seem likely now.
That might work well for someone that may need the proceeds of sales in the next few years. Another strategy for those filers would be to simply hold onto their assets longer and try and wait out this tax regime. One thing we can say about taxes is that they aren’t constant. Waiting can be tough when you need the cash, and it’s hard to know how long you might have to wait.
As always, it’s critical to pay close attention to the tax loss, but not to the extent that taxes are the only consideration – we don’t want the tail to wag the dog.
As always, Acropolis provides general guidance on tax-related matters, but we are not accountants and recommend that you consult your tax accountant or tax preparer for specific answers regarding your situation.