Kevin Rigg, Director of Financial Life Planning, Lead Advisor, CFP®, CPA
We usually save discussions about capital gains for the riveting tax planning sessions our clients have come to love at strategic planning meetings. Today, we are making an exception to that rule since capital gain changes are in the headlines and many people are wondering how these changes could impact them. If you find yourself in this camp, then read on for an enlightening summary of recent and proposed changes to the capital gain tax rules and what they might mean for you.
Capital gains are defined as the profit earned on the sale of an asset (stocks, mutual funds, real estate, etc.). At the federal level, these gains are generally taxed at lower rates. Here in Washington State they presently aren’t taxed at all, given there is no state income tax. This special treatment for capital gains could very well end for some, based on the following potential tax law changes:
Federal – While only a proposal at this point, President Biden has made it clear that raising capital gains taxes for some taxpayers will be a central part of funding his spending plan. Here are the details:
The top capital gains rate would increase from 20% to 39.6%
This tax increase would apply to those making over $1 million per year
Note the 3.8% Net Investment Income Tax (NIIT) is added on top of this, meaning the effective top rate gains would actually be 43.8%
Washington State – The state legislature passed a bill in April creating a new state capital gains tax, and Governor Inslee has signed it into law. Here are the details:
A flat 7% tax rate on net federal long-term capital gains, effective January 1, 2022
Tax only applies to gains after $250,000 deduction (for singles and married couples)
There are several exemptions to the tax, including real estate and certain small businesses
Two lawsuits have already been filed challenging the constitutionality of the law
Much remains to be resolved here and there are likely to be changes to the details listed above when all is said and done. While the laws/proposals may have limited applicability in their current form, they clearly could have a dramatic impact on capital gains taxes owed in certain situations. At SoundView, we will continue to be vigilant in providing our clients ongoing, proactive tax planning each year, and these changes will make it especially important to consider the following strategies:
Timing the sale of assets
Spreading out the recognition of income (i.e. installment sales)
Harvesting capital losses to offset capital gains
We will continue to track developments related to capital gains taxes and you can expect further information from your advisor as they analyze your tax situation heading into year’s end. Who would have guessed capital gain tax changes could make tax planning even more exciting than it already is?!