If Biden is successful, Wall Street and investors who make most of their money from capital gains may need to get used to the idea that their taxes will look more like those of wealthy professionals such as doctors, lawyers, entertainers and even investment bankers who currently face marginal income tax rates north of 50% in high-tax states.
“Nothing is going to surprise us as this point,” said Tara Thompson Popernik, director of research for Bernstein Private Wealth Management’s wealth planning and analysis group. “We’ve been telling our clients for some time that this is likely coming.”
Tax Strategies
Strategies to avoid a higher capital gains rate will depend on the details of the proposal, and on what other provisions get changed. An obvious technique, Schwartz and other advisors said, would be to keep incomes under $1 million—or whatever threshold is in the final legislation.
Investors might also avoid the higher rate by holding onto assets for as long as possible. That strategy, however, could be complicated by other provisions that Biden and Democrats have floated, like beefing up the estate tax and ending a rule, called step-up-in-basis, that allows asset-holders to wipe away capital gains taxes at death.
Life insurance products could also be a way for investors to cut investment taxes, as long as Democrats don’t target those strategies as well.
Alternatively, investors and business owners could rush to sell assets now, or before the end of the year—assuming tax changes aren’t made retroactive to the beginning of the year—to lock in lower rates. Advisors said they’ve been discussing sales of art and family businesses, along with highly appreciated stock, by year-end.
“If you’re going to do it anyway, maybe do it now,” Bernstein’s Thompson Popernik said. “The worry is that in the fourth quarter everyone else is going to be trying to make those changes at the same time.”
Thursday’s drop in the market prompted worries that, as Biden’s plans solidify and Congress starts to take action, stocks could continue to sell off. But it might not work that way.
“I would tell people to temper their fear of a significant drop-off in the markets,” said Bob Schneider, director of financial planning at Johnson Financial Group. Historically, markets have often risen even while taxes are going up, he said.
Indeed, stocks climbed on Friday after strong economic data.
Also, what else are investors going to do with their money? Especially at a time when the economy seems to be bouncing back from the pandemic, many investors want exposure to stocks.
“Yields are very low, so there aren’t a whole lot of other options,” Schneider said. “People will realize their gains and probably turn right back around and put their money back in the market.”
This article was provided by Bloomberg News.