As Congress continues to negotiate over budget and infrastructure legislation and key parts of President Biden’s domestic agenda advance, smart taxpayers will start planning for the potential tax code changes that will follow suit in order to finance the plan. (see my previous blog from October 2020 regarding Biden’s tax proposal while campaigning for the White House – https://lfadvisors.com/how-a-biden-presidency-could-impact-your-taxes/).
Earlier this year, Biden reiterated his goal to increase the capital gains tax rate for those with adjusted gross income of more than $1 million. The current Federal tax rate for long-term capital gains (held for more than 1 year) is 20%. The proposal would increase the maximum rate to be the same as the highest ordinary income tax rate (currently 37% but likely to increase to 39.6%). This would effectively double the long-term capital gain tax. The stock market and cryptocurrencies have huge gains over the last few years so we expect many people to have unrealized gains well over $1 million.
How can you plan now?
- Shift Income –Shifting certain flexible income payments such as bonuses, retirement plan distributions, option exercises and/or stock sales by either accelerating or deferring them so you do not hit the $1 million threshold.
- Less Portfolio Turnover – Making proactive decisions to not lock in gains in taxable accounts for reallocation purposes. Taxpayers with active trading could pay significantly more in taxes, therefore, reducing their net investment gains.
- Tax-Loss Harvesting – Selling positions with losses offsets the gains and reduces tax liability. A highly recommended strategy regardless of the proposed higher tax rate on capital gains. Sometimes having a few losing positions is not so bad.
- Hold & Do Not Sell – A taxpayer will not have any gains if they do not make any sales. Perhaps wait until the tax code changes in the future when a new President is in the White House.
- Cost Basis Method – Selecting specific lot cost basis versus average lot cost basis allows taxpayers to choose which lots to sell, therefore, creating more flexibility to lock in gains or loses.
- Reallocate in Retirement Accounts – since IRAs/Roth IRAs/401ks/etc. do not tax capital gains then selling positions in these accounts will not result in additional taxes owed. If you want to reduce stock holdings then use these accounts.
While we may be several months away from knowing if any of Biden’s tax proposals will become law, it is never too early to start planning for how they could impact you.