If President Joe Biden indeed proposes almost doubling the capital gains tax rate for wealthy individuals, to 39.6 percent, investment advisers will encourage many of their clients to sell any assets they're thinking of selling as fast as possible, before the tax change goes into effect, according to Treasury & Risk sister publication ThinkAdvisor. A few of them stressed that their wealthiest clients won't be the only ones hurt by an increased tax rate—many middle-class investors will feel the impact as well.
Biden is considering the capital gains tax increase to help fund his social spending plans, according to people familiar with the proposal. For those earning $1 million or more, Bloomberg reported, "the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4 percent."
The increase stands to affect "a lot more people than people realize," according to Jeffrey Levine, chief planning officer at Buckingham Wealth Partners. "It's not the clients that make a million dollars or more every year that you need to be worried about," he explained to ThinkAdvisor in a phone interview on Friday. "It's the people who might have a million dollars or more in any one year," a group that includes business owners who sell their business or anybody else with a large asset they may sell or buy, such as families involved in the sale of a home, he said. (Home sales are exempt from capital gains taxes under certain conditions.)
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An elimination of the step-up in basis on assets at death, along with making death a "realization" of gains, meanwhile, will essentially mean that all assets will be treated as if they have been sold on the day that somebody dies, he noted.
There are, therefore, "a lot of things to consider here," he said, adding that clients selling a business should try to do so in installments so the capital gains can be spread out over a few years. Those who always make over $1 million a year also become "incredibly strong candidates" for investment-only variable annuities, he added.
"It really seems that they're trying to attack capital formation," according to Ken Van Leeuwen, managing director and founder of Van Leeuwen & Co. in Princeton, New Jersey. "A lot of people invest—not just the people who make over a million dollars and incur capital gains," he told ThinkAdvisor in a phone interview. "You can get it in so many different ways," he said, calling 39.6 percent "pretty steep."
The question for now, if that is indeed what Biden proposes: Is that amount "just an opening salvo so that" the Republicans "start negotiating"? he wondered. But, he added, "it doesn't appear that the Biden administration really is negotiating with the Republicans yet at all on anything."
Everybody Should Calm Down
Two of the advisers and experts whom ThinkAdvisor polled on Friday pointed out that this is just a proposal so there is no need to panic.
"It is just a proposal, and it is a similar proposal to what President Biden proposed when he was running for president," Justin Miller, national wealth strategist at BNY Mellon Wealth Management, noted. Also, "there is a big difference between a presidential proposal and an actual congressional bill"—and a "big difference between possible and probable," he told ThinkAdvisor in a phone interview.
"I think we all have to take a deep breath and remember that these are just proposals that represent a starting point for negotiations, and as any good negotiator would do, President Biden started with a high rate out of the gate," according to Brad Dillon, senior wealth strategist at UBS Global Wealth Management.
Although Dillon said he does not think the rate will end up at 39.6 percent, "assuming it did, I think many investors would reassess the risk/reward calculus of investing."
Investors may end up not putting their capital "at risk if their return would be significantly negatively impacted by the higher tax rates," he explained. "This may mean fewer investments in startups and more investment in larger businesses that have a proven track record of a return on investment."
His prediction is that "clients and advisers alike will be vigorously monitoring the coming congressional negotiations to see where the rate ends up: The higher the rate, the more likely clients will be encouraged to realize gains now at the lower rate. The lower the rate, the less likely clients will change their investment decisions. If a client has a short-term liquidity need, where they'll need to sell assets to raise cash, then absolutely realize those gains before rates change, which could be this year if the effective date isn't prospective."
Adapted from: ThinkAdvisor
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Jeff Berman
Jeff joined the ThinkAdvisor team as a staff reporter in July 2019. Before joining ThinkAdvisor, he was a freelance reporter for five years, covering mainly technology, business, media and entertainment news for publications including The Miami Herald, Newsday, TheStreet.com, Long Island Press and multiple American City Business Journals websites. He also reported for several consumer electronics publications and was a technology reporter for publications of the Media & Entertainment Services Alliance. Prior to that, he worked as a reporter and editor for Consumer Electronics Daily and other Warren Communications News publications for 15 years. He graduated with an MA in journalism from New York University.
