An increase in the capital gains rate is under serious consideration in Congress. President Biden has proposed a plan making its way through Congress that would increase the capital gains rate on taxpayers earning more than $1 million from 20% to 39.6%, retroactive to April 2021. In the past week, the House Ways & Means Committee released its own proposal that also would increase the top capital gains rate to 25% for transactions made after September 13, 2021. Whatever the final number, an increase could represent a significantly higher tax bill in the near future.
Tips and strategies to avoid the capital gain rate increase
Below are some tax saving strategies we recommend you consider when planning for proposed changes to capital gain rates:
- Invest in municipal bonds in which the bond holder is in your home state. These bonds are not taxed at the federal and state level.
- Increase your 401(k) and IRA to the maximum contribution allowed. These retirement accounts are tax-deferred, and you will not pay taxes on the funds until you start withdrawing them, including the appreciation that would otherwise be subject to capital gains if the investments were held in personal brokerage accounts.
- 2021 contribution limit is $19,500.
- Individuals 50 and older can take advantage of the catch-up contribution and contribute an additional $6,500.
- Consider selling any investments that have fallen in value. These losses can be used to reduce any capital gain. In addition to offsetting capital gains, $3,000 can be used to offset ordinary income. Any remaining loss would be carried forward indefinitely.
- One thing to remember about this is to be careful to avoid the wash-sale rules. If you will be investing in a similar type of property within 30 days the IRS regulation does not allow a taxpayer to take a tax deduction when an individual sells or trades a security at a loss and, within 30 days, buys a substantially identical stock or security.
- Instead of investing in mutual funds, you may want to consider a separately managed account (SMAs). This gives your money manager the flexibility to make decisions for this account unique to you as the account holder. This is different from mutual funds, which are not customized for individual investors.
- If you have any installment sale contracts, you may want to consider recognizing the gain early to avoid paying the higher capital gain rate that could be a result of the infrastructure bill.
- Consider selling any business property sooner rather than later.
There are several moving parts to consider, and our tax advisors are here to work with you to find solutions that financially position you best.
Tanya Drinkwater, CPA, is a Senior with our Business and Tax Advisory Group. She can be reached at tdrinkwater@antarescpas.com.
