Selling a business or larger property could take years to plan and execute, but if the deal takes place in May or later this year, the owner could face a hefty capital gains tax bill at the suggestion of the President, Joe Biden .
The Biden administration would increase capital gains taxes for households earning more than $ 1 million annually from about 23% to 40.8%. The higher rate would help fund the American Families Plan, a $ 1.8 trillion package of spending on childcare, education, and other welfare programs.
The Effective Date for the Capital Gains Increase would be Jan.
The capital gains proposal is one of several high-income tax increases included in Biden’s budget that must be approved by Congress. During the legislative process, the entry into force date of the capital gains proposal – and rate – could change or tax increases could be thwarted.
But right now, the notion of a backward-looking deadline that would prevent capital gains from accelerating to beat the impending higher interest rate doesn’t go down well with investment advisors.
“Sometimes a company can take years to sell,” said Devin Pope, a senior investment advisor at Albion Financial Group. “People plan their retirement lives based on the after-tax revenue they would receive from a liquidity event. Changing the rules in the third quarter of the game doesn’t seem fair. The government should allow people to plan for significant tax law changes like this. “
Most of Biden’s other tax proposals – such as raising the highest ordinary income tax rate and ending the step-up base by levying capital gains tax on an increase in the value of more than $ 1 million in inherited assets – have an effective date of Dec. January 2022.
It would have been an appropriate time to begin the capital gain, said Dan Herron, director of Elemental Wealth Advisors.
“You can’t sell something,” said Herron. “If you want to make such a big change [in tax policy], you should do it as a year-end deal to give people time to plan. “
Backlash will create a lot of tax pain without adding much to the tax revenue that would be generated by the increase, said Marcus Blanchard, founder of Focal Point Financial Planning.
“A retroactive date for this tax is a sneaky way of offsetting our government’s massive overspending problem,” said Blanchard. “It won’t move the needle for you. Imagine your employer decides to reduce your wages retrospectively for work that has already been done. “
Biden’s tax hikes, which would gross in around $ 3.6 trillion in a decade, have dominated conversations between consultants and clients in recent months. A retroactive tax hike does not leave advisors and clients much choice in terms of avoidance strategies. But there are a few steps that can reduce the hit.
“We can structure the sale in certain ways to defer capital gains that will be even more valuable in the year ahead,” said Blanchard. In addition, “if we can reap losses, then we want to do it as well as possible.”
In addition to collecting tax losses, deferring capital gains recognition, giving or donating, and timing income are other options to help manage future taxes, said Nate Nieri, owner of Modern Money Management.
If the retrospective capital gain is approved, it would be “water under the bridge,” said Nieri. But it can also be an inspiration to find new ways to make a financial plan respond to unexpected developments.
“I’m trying to get creative,” said Nieri. “This stuff will always happen. How can we turn this into an opportunity that we will benefit from [a client]? There is always an opportunity when you know where to look. “
Bloomberg News contributed to this story.
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