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Where is the Capital Gains Tax Going?

Where is the Capital Gains Tax Going?

by Bill High

President Biden calls his new spending plan the American Families Plan.

As part of funding that plan he wants to double the capital gains tax rate to 39.6% for Americans with an adjusted gross income of more than $1 million.

When combined with a 3.8% surtax on net investment income for Obamacare, the tax rate would be as high as a whopping 43.4%, and over 50% in some states.

The White House estimates the tax increase would affect a small number of households. Nonetheless, it will have a significant impact across the country. Particularly, Biden’s bill also includes hiking the corporate tax rate to 28%.

There’s more. The capital gains tax rate increase would also apply upon an individual’s death. This would eliminate the effects of the current step-up in basis upon an asset’s transfer to an heir, treating the transfer as a sale event.

Each of these proposals will have a profound impact upon individuals and companies planning potential transactions, including business sales.

Of course, we can’t know yet which of these proposals might be enacted and at what level. What most concede, however, is that taxes are going up.


Plan for Higher Taxes

What are the implications?

The bad news for the business owner: less of the proceeds of the sale will end up in their pocket.

The good news is that donation of company stock in advance of the purchase agreement creates greater tax savings.

The practical aspect, whether for the business owner, the advisor or the nonprofit, is that the need for charitable tax planning is more necessary than ever.

Importantly, that tax planning needs to take place well in advance of a transaction. If you’re contemplating a transaction even a year from now, let alone months from now, the process of planning begins now.

The difference may be a better ending where the tax bill can be reduced in favor of more giving.



Photo credit: iStockphoto.com

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Published June 4, 2021

Topics: Family Business | Giving Strategies

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