Anchin’s Post-Election Insights: Planning for Upcoming Capital GainsAnchin AlertNovember 11, 2020
Next year may be one with many changes to the tax law. One key area of focus is how capital gains are taxed. While control of Congress may not be decided until January, now is the time to review your future capital gains related transactions and lay out your plan to minimize potential significant increases in tax.
Various capital gains tax rates increases have been proposed, including lifting the capital gains rates as high as the ordinary income tax rate for those taxpayers with income over $1,000,000. That nearly doubles the current tax rate, from 20% to 37%. Another proposal would further change the top tax rate on ordinary income to 39.6%. When you add in the healthcare surcharge that could amount to a top capital gains rate of 43.4%. This increased rate could not only apply to long term capital gains but also to qualified dividends.
While there may need to be more negotiation and compromise with the possible divided control of Congress or a razor thin majority in the Senate, it's best to plan now knowing the tax winds are blowing towards a capital gains tax rate increase.
Is the answer sell, sell, sell? A simplistic analysis may be yes, but we think a more detailed and thoughtful analysis is required on an individual by individual basis. Some things to consider:
- Investment horizon. How long do you plan on holding the asset? What do you think the future appreciation will be? If you plan on selling something in 2021 and have flexibility, consider selling in 2020 instead to lock in lower rates. However, if you think you have a good asset that will perform well in the future, prematurely selling may cause you to lose the ability to grow the funds that you use to pay the tax now.
- Future tax rates. Also related to your timeline for holding an asset is the proposed tax rate at the time of sale. If the capital gains rates do, in fact, go up significantly, will they remain there? If not, how long will they stay high?
- Will there be a step up in basis? Under current law, when a taxpayer passes away, the basis of their assets are “stepped up” to their then current fair market value. This would tell us not to sell assets and incur a capital gain if a taxpayer is closer to death. However, another tax proposal calls for ending the step up in basis rules. Would this proposal pass in addition to the increased capital gains rates?
As you can see, there are many variables, some of which are wildly unpredictable, that will go into the sell or hold decisions that taxpayers will have to make before year end. Also, don’t forget about the volatile stock market and the old adage – don’t let the tax tail wag the dog. One must still make good investment decisions.
The above tax planning considerations are key as we approach the end of 2020. Please consult your Anchin Relationship Partner to discuss this and other year-end tax planning strategies. We will continue to monitor the election results, and provide you with accurate and timely guidance.