Proposed Capital Gains Tax Increase

[Agostino Pintus]

President Biden has proposed to nearly double the capital gains tax rate in an attempt to fund the $1.8 trillion American Families Plan. This has caused some investors to fear a loss in their wealth, while others will be able to avoid it.

Within the new plan lies a tax increase for Americans earning more than $1 million a year in capital gains. The current capital gains tax for this bracket is 20%. This could possibly reverse the long standing laws where capital gains are taxed less than wages. The new plan would increase this percentage to 39.6%. However, it is believed that many wealthy individuals will be able to dodge it.

There will be ways (mostly legal) to avoid this increased tax burden. The wealthy can always find tactics to reduce their tax liability. One such example is the “step-up” basis. This is used when someone inherits a very large amount of assets. They can inherit it at current value and only pay gains on the appreciation made during their holding time. This means they could hold onto that asset for a short amount of time after inheriting it, then sell it with a $1 million dollar tax exemption. Charitable donations are also exempt from taxes. Therefore, people could donate assets and money to nonprofit organizations that they or their family are affiliated with in order to funnel the money back to them. As a result, some argue that these increases in capital gains taxes won’t raise much money as the wealthy are smart enough to avoid their tax liability.

If the plan is successful however, it will create revenue to fund new social programs such as free daycare and community college, as well as family leave and child care. This would put America on par with many European nations that already offer these programs to people. For example, in Sweden college is free, and new parents can both take up to a year of paid time off when a child is born. As one of the richest countries in the world, many argue that we owe it to our citizens to provide these services free of cost.

On the other hand, many wealthy individuals feel that they should not have to pay more taxes for others to receive free benefits. Furthermore, there is an argument that low capital gains rate stimulates entrepreneurship. It gives people an incentive to start their own business rather than be an employee. Real estate investors will have to pay extra attention to tax laws in the coming years. This makes it a very important time to find a good accountant if you don't already have one.

Be Bulletproof,

Agostino