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November 9, 2021

High Net-worth Individuals Would Feel the Effects of the Proposed Capital Gains Tax Increase

President Biden’s Build America Back Better Act proposes numerous tax law changes that would affect corporations and individuals. One potential change that could significantly impact high net-worth individuals is an increase in capital gains tax rates. Below we answer important questions around the capital gains changes, including how much your rate could increase, when it would go into effect and if you would be subject to a 3% surcharge.

How much would my capital gains tax rate increase?

Under the proposal, the capital gains tax rate would increase from 20% to 25%. This 25% bracket kicks in once a taxpayer’s income exceeds $501,600 for those married filing jointly. Add in the 3.8% surtax on net investment income and the total tax rate on long term capital gains and qualified dividends would be 28.8%.

When would the new capital gains rate go into effect?

If passed, this new rate would apply to transactions that occur after September 13, 2021. The bill also proposes a transition rule indicating that the current 20% rate would still apply to any gains and losses realized for the portion of the tax year prior to this introduction date. Gains recognized later in the same taxable year that arise from transactions entered before the date of introduction are subject to a written binding contract and are treated as occurring prior to the date of introduction. 

Would I also be subject to a 3% surcharge?

In addition to raising the capital gains tax rate, the provision also imposes a surcharge on high‐income individuals, trusts and estates. This surcharge is equal to 3% of a taxpayer’s modified adjusted gross income (AGI) in excess of $5 million, if married filing jointly, or $100,000 for trusts. If passed, the surcharge would be effective for taxable years beginning after December 31, 2021.

What else should I know about the capital gains changes?

This tax proposal, which includes the 25% capital gains tax rate, replaces a previous proposal in which long term capital gains and qualified dividends would be taxed at ordinary tax rates for taxpayers with income over $1 million. 

The previous proposal also wanted to tax capital gains upon the owner’s death, and this has since been omitted from the tax proposal. Currently, if a family member with extensive unrealized gains passes away, their beneficiary would 1) receive a “step up” from the original cost to the fair market value of the investments and 2) owe zero in federal tax. 

Specific provisions of the new law could still be modified before final legislation is passed. Our advisors are closely following the tax law proposals and legislation changes and will continue to publish insights to keep you informed. To discuss how we can best assist you and the associated fees, contact an Anders advisor below.

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