Taxes: One Of Life's Certainties

By Tim Greife, Financial Advisor

As our government continues to take on debt, we need to work on paying it back. One of the ways to pay it back is through taxes. Currently some taxes are at all-time lows. That could change in the near future creating complications. How might this affect you?


Currently, House Democrats are proposing an increase from 20% to 25% on long-term capital gains rates for investors in the highest tax bracket. In addition, the Democratic proposal includes top corporate tax rates of 26.5% (currently 21%) and top individual tax rates of 39.6% (currently 37%). This is significant for business owners with high incomes.


These potential increases to long-term capital gains would apply to asset sales occurring after September 13th, 2021, leaving no forward looking grace for investors to make adjustments. This would affect investors with taxable income above $400,000 (single filers), $425,000 (head of household filers), and $450,000 (married filing joint). At this time, the proposal doesn’t include changes to the 15% long-term capital gains rate for investors with incomes below the above thresholds. Short-term capital gains (sales of capital assets held less than one year) are taxed as ordinary income and will also remain the same.

How can we strategize to minimize the impact of these potential changes?


Hold your long-term investments even longer: Tax changes, both increases and decreases, happen all the time. A shift in who controls the House and Senate could lead to a repeal in future years. Remember, capital gains are not taxed until they are realized.


Leverage tax-advantaged accounts: Maximizing contributions to retirement accounts (401(k)s, Roth IRAs, IRAs, etc.) and Health Savings Accounts (HSAs). Another option would be to consider a non-qualified annuity in the right circumstances.


Municipal bonds could be another option to consider: Income from a muni-bond is a tax free event. Depending on the bond, it could be tax-free for both federal and state.

 

While the proposed changes will not affect the majority of taxpayers, those that could be affected should take a proactive stance. Other tax measures are making their way through Congress, and we will continue to monitor the developments as they unfold.