As President Biden prepares to push for a major hike in capital gains taxes, advisors say they are hard at work adjusting their strategies to  minimize the impact on their clients.

To pay for a permanent child tax credits and other social programs, the White House is considering a capital gains tax hike to 39.6% on people earning $1 million and over. Wealthy individuals could see their federal rates reach as high as 43.4% when the investment tax is included, Bloomberg noted.

Advisors—some of whom have been bracing for a capital gains increase since Biden included it in his campaign platform last fall—are already planning and implementing capital gains harvesting and reduction strategies for clients to blunt the impact of such an increase. 

Tax attorney and CPA Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Mich., warned his clients late last year that they needed to start thinking seriously about what to do about their capital gains in the event Biden went through with his promised capital gains tax hike.

Like many advisors, LaBrecque believes the tax increase will have far-reaching implications for the stock market and the economy. “We think that it will create a major shift in volatility because a lot of people will be doing gain harvesting or tempering. If you’re holding onto legacy holdings for the sake of holding them, it is probably a good time to harvest them,” LaBrecque said. 

While a tax can’t be collected retroactively, capital gains tax rates can become effective on the date legislation is passed, he warned. “I try to be cautious. For example, I have clients who sold a business as an installment sale. I told them, ‘If you accelerate full payment now, you’ll pay a 23.8% as opposed to possibly 38%. They agreed.”

Another strategy LaBrecque advises for the wealthy: “We have them donate highly-appreciated stock to charity and then buy shares right back,” he said. Clients get the tax deduction, are able to eliminate the capital gains bill and still get to hold the stock, he said.

Clients can also use their donor-advised funds and charitable remainder trusts to donate highly appreciated stock and slash their capital gains tax bill, LaBrecque said. He advised a recent client to donate a few million dollars in highly appreciated stock to a charitable remainder unit trust (CRUT), which eliminated the tax bill while giving them an income stream of 5% a year. CRUTs stipulate that grantors receive a certain percentage of income each year. The remaining balance, when they pass, will go to their charity of choice—in this case their alma mater, he said.

Roths, back-door Roths and Roth conversions are also vital tools for just about everyone who wants to save on their capital gains taxes, LaBrecque said. “Say you and I have Tesla stock and we think it is going to $2,000 a share. If we convert it into a Roth, we can pay minimal tax now and allow the stock to stock to appreciate tax free. The surviving spouse will get to use it tax free and heirs get it tax free for 10 years,” he said.

Estate planning attorney and certified financial planner (CFP) Michael Whitty, a partner with Freeborn & Peters LLP in Chicago, said he is advising clients to consider the Biden capital gains tax along with Democrats’ proposal to impose capital gains tax at death “and just go ahead and realize capital gains now before the rates go up. The tax would be accelerated, but it would reduce the taxable estate for tax purposes and the capital gains at death would be reduced,” he said. 

Kelly Pedersen, founder of Caissa Wealth in Bloomington, Minn., said that while many clients may think a capital gains tax applies only to the ultra rich, “we will remind them to think again. If the wealthy with very large holdings in some of the most growthy stocks decide to sell to get ahead of these capital gains taxes ... this will hurt most investors, especially in a pandemic world.”

“We have been advising clients to sell enough for liquidity and needs for the near future as well as rebalance to take the profits off the table to they don't get backed into a corner,” she said.