Vice President Kamala Harris has put forth a proposal to raise capital gains tax rates to 28% for households with an annual income of over $1 million. This marks an increase from the current rate of 20% for top earners. The intention behind this tax policy shift, as stated by Harris, is to incentivize investment in American innovators, founders, and small businesses. While Harris’ proposal aligns with President Joe Biden’s tax policy in most aspects, the suggested capital gains rate is still lower than the 39.6% rate put forward in Biden’s fiscal year 2025 budget.
Presently, investors are taxed at 0%, 15%, or 20% for long-term capital gains, in addition to a 3.8% net investment income tax (NIIT) once their modified adjusted gross income (MAGI) exceeds certain thresholds. Harris’ plan not only seeks to raise the capital gains tax rate but also proposes an increase in the NIIT to 5%, according to a report by The Wall Street Journal. It is essential to note that assets owned for a year or less are taxed at regular income tax rates, which are set to rise post-2025 if no legislative action is taken.
As Harris’ and Biden’s tax proposals would require approval from Congress, financial advisors are cautious in implementing any preemptive changes. Louis Barajas, a certified financial planner and enrolled agent, emphasizes the need to refrain from hasty decisions until new laws are enacted. The current political landscape, with the control of the Senate and the House up in the air, adds to the uncertainty surrounding the future of tax policy changes. Therefore, a watchful approach is advisable before making any significant financial moves.
High-earning individuals, defined by taxable income exceeding $1 million per year, are the primary target of the proposed higher capital gains taxes. However, the effects could also trickle down to lower earners, particularly those engaged in a one-time sale of businesses or commercial properties. There might be a surge in tax planning activities, especially among older individuals with rental properties looking to offload their assets. The timing of such sales, in conjunction with other income sources, will play a pivotal role in determining the final tax liability.
John Chichester Jr., a certified financial planner and CPA, advises on various methods to minimize the impact of heightened capital gains taxes. Leveraging capital losses carried forward from previous years is one effective strategy to reduce yearly income and potentially avoid the higher tax rate. With the ongoing volatility in the market, certain assets might provide opportunities for tax-loss harvesting, enabling investors to optimize their tax position. The individualized nature of tax planning underscores the importance of seeking professional guidance tailored to one’s financial circumstances.
The proposed increase in the capital gains tax rate by Vice President Kamala Harris has significant implications for high earners and, to some extent, lower-income individuals involved in asset sales. While the exact contours of the tax policy change remain contingent on congressional approval, it is crucial for investors to stay informed and proactive in their financial decision-making. By adapting to the evolving tax landscape through strategic planning and expert advice, individuals can navigate the potential challenges posed by the proposed tax rate hike.
Leave a Reply