We have known for some time that the Biden administration and its allies in Congress want to raise capital gains taxes on high earners. And we learned last January, after the Georgia runoff elections, that it’s more likely to happen.

The administration’s comments in April and May suggest it wants to increase the rate for those with an adjusted gross income of more than $1 million—increasing the current maximum long-term capital gains rate (which is currently 20%) to match the highest ordinary income tax rate (which is currently 37% but proposed to increase to 39.6%). Furthermore, the administration wants this increase to apply retroactively to April 28 of this year.

Putting aside the question of whether the tax will be retroactive, let’s imagine the increase has already been implemented. What would the new world of financial planning look like?

Here’s a glimpse.

Inter-Year Income Shifting
The administration’s plan assumes that a taxpayer is earning more than $1 million in a year and engaging in transactions that generate long-term capital gains during that year. While we don’t yet know exactly how the threshold would be applied, it would likely prompt taxpayers to manage their income in some years so they’re in less danger of triggering the higher tax. With that in mind, they could take advantage of flexible income payments through bonuses, discretionary dividends, retirement-plan distributions, option exercises, stock sales and other transactions by either accelerating them into one year or deferring them into another so they don’t hit the $1 million target. Meanwhile, they might bunch the sale of their long-term assets into those years in which their income is less.

More Tax-Sensitive Investing
Taxpayers anticipating changes from the White House might be more likely to take taxes into account when they make investment decisions in the future. High earners with high-turnover stock portfolios would likely do less trading. They’d also likely seek less dividend income (if we assume that qualified dividends are taxed at higher rates as well). And they would be more likely to turn to tax-free income.

But another interesting development is that those same high earners would likely no longer worry as much about the difference between short-term and long-term gains. In this key respect, they would worry about taxes less (outside of their state taxes, which is a different problem).

Longer Holding Periods
Conventional financial planning wisdom tells us that “the tax tail should not wag the dog.” In other words, keep taxes in mind, but try not to allow a zeal for avoiding taxes to get in the way of prudent investment decisions.

Yet sometimes people do let the tail wag the dog—and for good reason, such as when their unrealized gains are large. High earners who now face a capital gains tax rate of about double the old rate are likely to want to hold on to investments longer to postpone taxation. Investment managers, too, would feel more pressure to extend holding periods to increase after-tax returns for their investors (though, under the administration’s proposals, many fund managers would themselves lose much of the benefit they once enjoyed through their use of carried interests to generate service income taxable at capital gains rates).

The administration is also trying to repeal the step-up in cost basis for an investment when its owner dies. If the White House is successful in this effort, it would remove a traditional incentive to hold a good long-term investment. A continuing incentive to hold, however, would be the possibility that capital gains tax rates will fall back to lower levels in the future. (Just as political power changes in Congress and the executive branch, tax rates change over the years.)

Sanctioned Forms Of Tax Mitigation
Under a Biden tax regime, qualified small business stock, qualified opportunity zones and other sanctioned forms of tax mitigation would become more common. The days of permissible tax shelters ended many years ago, but the Internal Revenue Code still offers legitimate forms of tax deferral, mitigation and even avoidance for eligible taxpayers. It seems likely that many of these opportunities would be looked at more carefully by high earners.

Qualified small business stock, for example, can be sold at lower tax rates—and sometimes with no capital gains tax. The requirements for these sales to go forward are laid out in Section 1202 of the Internal Revenue Code, and under Section 1045, the proceeds can be reinvested in other qualified small business stock in a way that allows the owner to defer taxes. Under Section 1044, certain gains from the sale of publicly traded securities can also be rolled over into specialized small business investment companies.

If long-term capital gains were taxed at ordinary income levels for high earners, this decision would become even more complex. C corporations, for example, could become more popular because, in some cases, their stock can be treated as qualified small business stock (as we discussed earlier).

Then again, if the corporate income tax rate went up too, C corporations would face increased double taxation. Pass-through entities might also become less popular, since the 20% qualified business income deduction is scheduled to expire after 2025.

Also, consider the implications of the net-investment-income tax of 3.8%. High-income taxpayers fear that if the Biden administration gets its way, the new maximum capital gains tax rate for them would be 43.4% (39.6% + 3.8%). That’s true in many cases, but not all the time. The net-investment-income tax allows exemptions for certain pass-through entities when the owners and entity are actively engaged in a trade or business. This simple distinction would itself become much more important in a higher-rate environment.

Complex Business Sales
Business sales would also become more complex. Yes, the taxes for a sale could be higher, but the structuring of the deal would require even greater planning, often long before any sale. Business owners would try to avoid higher taxes, taking advantage of available tax mitigation strategies and possibly proactive pre-sale gifting (depending on how gifts are treated under the new law). Even the strategic use of installment sales would need to be reconsidered, depending on how the final capital gains rules are implemented. For example, could a business owner sell in a low-income year and use the installment method to make sure the entire sale is taxed at a lower rate?

Charitable trusts also would become more popular. These allow donors to contribute appreciated assets into a charitable trust in exchange for a deduction and a continuing, tax-efficient income stream, a strategy that could become even more valuable in the context of higher taxes.

Gifting Becomes More Routine
It’s harder to predict what will happen with gifts, since the administration has floated the idea of recognizing capital gains on gifts to non-spouses (within limits). If that doesn’t ultimately happen (and the carryover-basis regime survives), gifting would still be a good way to defer taxation (at least until the recipient sells the assets). Of course, gift taxes must also be considered, but gifting would still be a useful technique to blunt and defer taxes if rates rise. If the government does decide to recognize gains on gifts, then the opposite may be true, though it seems likely there would be exceptions to allow for at least some gifting of appreciated assets.

A Greater Need For Planning
So this is what financial planning could look like in an environment of tax increases. It would, in any event, look quite different and far more complicated than the world we live in now, and there would be a far greater emphasis on planning designed to ensure that well-advised, high-income taxpayers never feel the full brunt of the increases.

Michael J. Nathanson, JD, LLM, is chairman and chief executive officer of The Colony Group.