President Joe Biden is expected to propose doubling the tax rate wealthy Americans pay on investment returns when they sell stocks and other assets.
According to financial experts, however, investors shouldn’t necessarily rush to the exits.
Under Biden’s proposal, the tax rate on federal capital gains would be up to 43.4% (including an existing Medicare surcharge), according to a Bloomberg report.
“Capital gains would be the highest tax income we have,” said Leon LaBrecque, accountant and certified financial planner with Sequoia Financial Group, based in Troy, Michigan.
Capital gains tax
Investors currently pay a maximum rate of 23.8% for long-term capital gains.
This includes a capital gains tax of 20% on assets held in taxable accounts for more than a year. This also includes the 3.8% surcharge on net investment income created by the Affordable Care Act to fund Medicare expansion.
Under current law, long-term capital gains are taxed favorably in relation to wages. The rich, for example, pay a top wage of 37% on wage income.
The White House plan would instead tax capital gains as ordinary income with a proposed maximum rate of 39.6%. According to Bloomberg, this would apply to those with an annual income greater than $ 1 million.
(Short-term capital gains or gains held for a year or less are already taxed as ordinary income under applicable law.)
The Biden plan would also maintain the Medicare surcharge, creating a long-term long-term capital gains rate of 43.4%, according to Bloomberg.
The highest long-term capital gain rate is for individual taxpayers with income greater than $ 445,850 that year. (For married couples filing a joint tax return, the price is over $ 501,600.)
Medicare surcharge applies to single applicants with income over $ 200,000 or married couples with $ 250,000. (These amounts are not indexed for inflation.)
Don’t hit the sell button.
The tax hike is part of a government effort to raise taxes for Americans who earn more than $ 400,000 a year.
Biden is expected to post the proposal next week to fund the American Families Plan, which will include expanding childcare subsidies and making community college tuition free for everyone.
However, many aspects of the plan remain unclear.
For example, according to tax experts, the plan could exempt a certain portion of the capital gains of wealthy investors from the higher tax. It can also exempt certain taxpayers, such as some entrepreneurs, from the levy.
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It is also uncertain whether Democrats, who have the closest majority in the Senate, could pass the proposal as written. Even after it’s over, the date the tax hike will take effect remains unknown.
The S&P 500 erased previous gains and closed 0.9% lower according to published news reports.
“I wouldn’t necessarily hit the sell button on rumors,” said Jack Ablin, chief investment officer and founding partner of Cresset Capital Management, on CNBC Thursday. “That doesn’t make a lot of sense to me.
“There will be plenty of time to plan and act on any tax or tax proposal that will ultimately be in place,” he added.
According to LaBrecque, getting stuck is likely the appropriate approach for long-term investors. Just four years ago, the Trump administration cut taxes for many individuals as an example of how quickly conditions can change.
“If you know you’re going to be sitting on something for a long time, don’t worry about it,” LaBrecque said of the Biden proposal.
But taxpayers who know they will be selling a highly valued asset next year, for example, should consider doing so now in case capital gains taxes increase, he added.
When a proposal becomes law, it would change financial planning beyond selling investments.
For example, individual retirement accounts and 401 (k) plans could become more attractive as taxpayers would not be subject to the Medicare surcharge of 3.8%, LaBrecque said. Employees might also be better off receiving a cash bonus instead of restricted stock units, he added.
“This whole thing has strange aspects,” he said.