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).

More Tax-Loss Harvesting
Tried-and-true planning techniques such as tax-loss harvesting would become even more important for high earners in a new tax regime, and that would make it more likely they would invest in liquid holdings that can be easily replaced by similar holdings (as long as the trades are consistent with the wash-sale rules).

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.

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