Take the Gain, Pay the Tax and Run?

Each Presidential candidate has put forth a proposed plan for Federal taxation of long-term capital gains which, if passed into law in 2021 or beyond, could have major impacts on your decision regarding the timing of sales or transfers of appreciated capital assets.  

1. Mr. Trump has proposed reducing the maximum long-term capital gains tax rate from the current maximum of 20% to 15%. Assuming you sell capital assets in 2020 and have a taxable gain amount greater than $250,000, you’d also owe the Net Investment Income Tax (NIIT) percentage of 3.8% on the amount over the $250,000 threshold (if married, $200,000 for singles), for a combined tax rate of 23.8% on the long term capital gain. Obviously, if Mr. Trump’s plan to reduce the maximum tax rate to 15% is adopted in 2021 by Congress, your tax bill would be favorably impacted if you wait until 2021 or later to sell the capital asset.

2. Mr. Biden has proposed raising the ordinary income tax rate for incomes over $400,000, and his capital gains tax plan proposes to tax long-term capital gains and qualified dividends at an ordinary tax rate of 39.6% for the portion of the taxpayer’s income that exceeds $1,000,000. By way of example, if a taxpayer has $500,000 of ordinary income and $800,000 of capital gain from the sale of assets, for a combined income of $1,300,000, the proposed ordinary income tax rate of 39.6% would be assessed on $300,000, and the taxpayer would still be liable for the NIIT of 3.8% on the gain over $250,000 (if married) for a combined tax rate of 43.4% on the $300,000, in addition to the regular applicable capital gain tax rate and NIIT for the capital gain amount which is not subject to the new ordinary income tax rate.

3. Some people are taking the action of selling appreciated capital assets in 2020 to take advantage of the known tax rates, e.g. 20% maximum capital gains tax plus 3.8% NIIT for a total of 23.8% combined rate. Coupled with the fear that Congress might adopt Mr. Biden’s proposed plan to eliminate Section 1031 tax-deferred exchanges for any taxpayer earning over $400,000, and the proposed plan to eliminate a decedent’s assets receiving a stepped-up tax basis at death, some clients are making the decision to sell appreciated assets.

Obviously, not everyone will be in the income levels mentioned in Mr. Biden’s proposals, nor is there any assurance that all of his proposals will be adopted by Congress, but with the current government debt levels, continuing budget deficits, and the need to generate more tax for the payment of the debt or the funding of new programs, we can be fairly certain that tax rates will need to be increased at some point in time.

Please seek the advice of your accountant, and let us know if Lyons Gaddis can provide legal help for the sale or transfer of assets should you decide to move or sell assets.