Capital Gains Rates: How you can prepare for changes ahead
February 17, 2021

The New Year and a new majority in Congress may bring significant changes to our tax laws, which makes now a good time to start preparing.

Among the most impactful potential changes we can expect is a hike in the capital gains tax. Some legislators have considered taxing capital gains as regular income, effectively doubling the tax on capital gains.

Worsening this possible scenario, according to some tax advisors, is that capital gains may be subject to the 3.8 percent net investment income tax. Additionally, the tax could escalate even more for those who live in states with higher state income tax rates. Should such dramatic changes take effect, the capital gains tax on earnings over $1 million could reach, or even exceed, 50 percent, some project.

In fact, there are a few in the financial planning world who are even speculating that a capital gains tax increase could be made retroactive to January 2021. Though that scenario appears unlikely, some financial experts believe two other possibilities exist: (1) the change could take effect Jan. 1, 2022, or (2) the effective date may be the date the legislation takes effect.

Any of these possibilities would have serious planning consequences for taxpayers and advisors suggest that it may be smart to sell appreciated assets now, rather than later, in order to lock in the current capital gains tax rate. Our tax experts can help you determine a strategy that makes the most sense for you.

Let’s explore a few options that can help you reduce your capital gains tax. One approach would be to sell your assets before the rates go up. However, the increase may be retroactive, so this may not be a viable option. A second option, if your assets are modest, would be to gift the amount of your capital gain to an individual (loved one, family member, etc.).

If your gains are more significant, you could consider creating a donor-advised fund. With this option, your appreciated assets are donated directly to charity and you avoid paying a capital gains tax.  Gifts to a donor-advised fund allow contributors to take an immediate tax deduction on assets set aside to provide ongoing support to a public charity.  Contributors are eligible for a tax deduction of the appreciated value of the asset, up to 30% of their adjusted gross income.

Finally, for larger, appreciated assets that would create considerable capital gains at a sale, consider creating a trust.  Trusts are legal entities that allow a third party, or trustee, to hold assets for one or more beneficiaries. Typical trusts used for this purpose are:

a.    Charitable Remainder Trust

b.    Bypass Trust

c.    Family Trust

When you make a gift transfer of assets into a family trust, you provide for someone, such as a spouse, to be the principal trust beneficiary. Should the principal beneficiary die and no other beneficiaries are named, the asset returns to you, the donor. This could help to avoid a gift tax, should there be a retroactive change in exemption amounts.

As you can see, there are numerous considerations that factor into these decisions. As in all financial and tax planning matters, we encourage you to schedule a call or meeting with one of our advisors to help you review your options and make decisions that best fit your estate and tax planning needs.


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