President Biden and Future Capital Gain Tax Rates
By Freddy H. Robinson, CPA, Partner
On April 28, 2021, President Biden released the American Families Plan, which included a proposal to increase the long-term capital gains tax rate for households with income exceeding $1 million to 39.6% from the current 20% tax rate. The announcement of the plan formally kicked off the legislative discussions and prompted taxpayers to consider what options they might have now and in the future.
Capital gains taxes are assessed on assets that are sold at a profit. While this is most commonly associated with marketable securities, it can also apply to the sale of real estate, a business and other types of assets. Gains are computed using the price received for the asset(s), net of any selling costs, less your cost basis. Your cost basis includes not only the price paid for the asset when acquired, but also includes any costs to acquire the asset, such as commissions to purchase stock. Cost basis is also reduced by the amount of any depreciation claimed during the entire period of ownership.
In the President’s budget plan released on May 28th, Biden proposed making the increased long-term capital gains tax rate effective retroactively to April 28, 2021 in order to prevent wealthy taxpayers from selling off assets to avoid the tax increase. The Biden plan leaves the current capital gains tax rates as is for those taxpayers with adjusted gross income under $1 million. Passage of the Biden plan is by no means a certainty. Even if it does pass, many of its provisions may be altered. It is likely that the capital gain tax package as proposed will be a tough sell to the Republican members of the House and of the Senate, where the Democratic majority is quite small. That said, there are some planning considerations for the wealthy if it does pass and become law:
- If the effective date of the increased tax rate changes to a future date with advance notice, sell long-term appreciated assets before the effective date
- Use timing to determine when to sell assets in order to avoid reaching the $1 million threshold and incurring the new higher tax rate
- Harvest unrealized capital losses to reduce taxable income. Note that only $3,000 of net capital losses is allowable in any year
- Invest in your retirement by using IRAs, 401(k)s, and SEPs to reduce current taxable income
- Avoid recognition of gain by donating appreciated assets (must be long-term) for fulfilling charitable obligations
- Utilize qualified charitable distributions from an IRA to charitable organizations (must be age 70½ and amount is limited to $100,000 per year)
- Utilize the installment sale method of reporting when available to spread capital gain income recognition over multiple years
While nobody can accurately predict what the final outcome of the capital gains tax legislation will look like or when it will be effective, it is reasonable to assume there will be a lot of negotiation on the final version of any changes to the capital gains tax rate. Follow this story closely in the news and contact your tax adviser with any questions.
Freddy H. Robinson Partner, CPA
Freddy Robinson is a tax partner and has been with Bernard Robinson & Company for over 40 years. He is responsible for tax-related services to individuals and closely held businesses. His areas of specialty include complex income tax issues, Internal Revenue Service examinations, mergers and acquisitions, business valuations, succession planning, estates and trusts, S […]