Weekend Reading: How to Prepare for a Retroactive Capital Gains Tax Hike

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

You’ve more than likely heard the Biden administration’s proposal to raise the capital gains tax on high-income earners, but what about that hike being retroactive? Although Congress has yet to make an official decision, it’s possible, and could mean the date for these increases has already passed. Read the article from Think Advisor below.


A quick recap: As part of the proposal, the Biden administration would raise capital gains for individuals earning more than $1 million from their marginal tax rate (37 percent) to 39.6 percent. Additionally, these taxpayers would continue paying the 3.8 percent Medicare surtax on capital gains, which would bring the total increase to 40.4 percent in 2021, and 43.4 percent in 2022.

How to prepare: From a hypothetical perspective, this article takes a look at a few scenarios in which the higher capital gains tax is retroactive as of late April or late May 2021, and ways in which a client earning more than $1 million could maximize their tax efficiency. The instances are as follows:

📌If the client experienced a multimillion-dollar sale in 2020: In the event sale proceeds are paid out over the course of several years, it’s suggested the client pay taxes in full this year, as the capital gains would be based on 37 percent, versus 39.6 percent

📌If the client anticipates a multimillion-dollar sale soon: They should consider making that transaction this year, which could save them $260,000 on a $10 million sale, for example

📌Whether a multimillion-dollar sale occurs this year or in the future: The end-goal is keeping a taxpayer’s income under $1 million, which can be done by paying taxes upfront now or stringing out payments in the future

Plan appropriately: We receive questions about capital gains tax rate risks constantly. I hope this article illustrates how few Americans should be impacted by this proposal, and offers insight for those of you that may see a change. Just remember: “Never let the tax tail wag the dog.”