Tax Strategy - Capital Gains Tax

By J. Tyler Thompson, Financial Advisor, CFP®, CEPA®, AAMS®, WMS®

The proposal by President Joe Biden to raise capital gains taxes to the higher ordinary income tax rates would push America to the highest top marginal tax rate on capital gains in the entire Organization for Economic Co-operation and Development (OECD).

Owners who may sell their businesses in the coming years, entrepreneurs who are building fast-growing companies, and anyone making significant income from their business interests should pay close attention as this bill makes it way through Congress.

Packed inside a broader bill called the “American Families Plan,” Biden’s proposal would lift the top marginal income tax bracket to 39.6%, up from 37% currently.

For people earning more than $1 million in income, their capital gains — both long-term and short-term — would be taxed at that same rate of 39.6% too.

That would nearly double the long-term capital gains tax rate, which is currently 20%.

Biden’s proposal aims to raise revenue as the economy makes a tenuous recovery from the covid pandemic and faces new threats from rising infection and death rates from the fast spread of the delta variant. It’s also an effort to address and reduce income inequality, which is an enduring hallmark of many Democratic policy platforms.

So what does it mean for you?

Only 0.7% of households would face a tax hike under the Biden plan, according to the Institute on Taxation and Economic Policy.

However, almost all of the pain would be felt by the richest 1% of Americans — especially those who are considering selling their business or other investments in the coming years.

The pace of acquisitions, divestitures and other exits in the first half of 2021 indicates that this year will outpace last year for deal volume and transaction value, according to a recent report by PwC. Deal flow could jump by double digits this year based on the current trajectory, PwC said.

Many acquisitions that were thought to be a few years away from coming to fruition are accelerating now because of easy access to low-cost capital, demand for high-quality desirable assets, a strong market for initial public offerings (IPOs), the rise of special purpose acquisition companies (SPACs), uncertainty about future tax policy and many other factors.

What should you do about it? The short answer is: nothing right now.

Financial advisors, exit planning strategists and economists agree that business owners shouldn’t make any snap decisions based on a proposed bill that may not gain enough support to pass. And as the bill advances, it will almost certainly undergo major changes.

And even if it does pass, there would be plenty of time to review your current tax planning strategy to seek alternative ways to mitigate a potential hit for higher capital gains taxes.

One solution could be to accelerate realizing gains before the higher rate is applied by disposing of assets with a low cost basis and making other portfolio diversifications, Dana D’Auria, co-chief investment officer at Envestnet PMC, told Forbes magazine.

Whatever the fate of Biden’s proposal, business owners should pay close attention to that and other legislative changes that could impact their decision on when, or whether, to sell. Your Certified Financial Planner can guide you through the implications if this and other proposals to help you stay on track with your long-term goals so you can life the life you want.

Any opinions are those of J Tyler Thompson and Capitas Advisory Group and not necessarily those of RJA or Raymond James. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected