A Taxing Proposal

President Biden made news recently by releasing a proposal to raise the capital gains tax. This proposed change would increase the amount that the highest-earning Americans pay from 20% to as high as 43.4% for top earners. The announcement initially sparked a reaction from Wall Street that was both swift and negative.

The market’s immediate response indicated this to be a “sell the news” event and one that will be unfavorable for most Americans and the stock market in general. Before we jump to that conclusion ourselves, let’s examine what exactly is proposed and who would be affected.

As it stands now, the suggested policy seems only targeted at Americans earning over $1 million in annual income. That itself cuts the affected group to only 0.3% of the population. Investments in 401(k)’s and IRA’s would also not be subject to any higher taxes regardless of size.

For those that do fall in the category of earning over $1 million annually, does this mean it makes sense to sell inflated investments now and lock in lower taxable gains? Not necessarily. It is still too early in the discussions to know if this would be a change beginning next tax year or a plan to make the law retroactive to cover all investment sales made in 2021.

Biden’s policy would mark the first time the capital gains tax has changed since 2012 when President Obama raised the maximum bracket from 15% to 20%. Historically, many US presidents have tinkered with capital gains, and we have seen much higher taxes in the category before. During the 1970s, they reached 35% for nearly all Americans. This proposal still places the vast majority in the 20% and below bracket.

Some financial pundits claim Biden’s 43.4% number is simply a planned high starting point, and the Democrats would be happy even if the final amount ends up being closer to 28%. For that, we will need to wait and see how the legislative negotiations in Congress pan out.

At the moment, we must take this for what it is right now, simply a proposal. If you find yourself being one of those Americans with an income over $1 million, there are planning actions we can take to ensure you preserve as much of your hard-earned capital as possible. Talk to your advisor about what this change could mean for you. Your team at Rather & Kittrell is closely monitoring any potential tax changes from Washington and how they may affect our clients’ portfolios