On November 7, 2020, major news networks declared former Vice President Joe Biden the winner of the 2020 Presidential Election. With Biden’s election, there is likely to be a shift in many policies, from foreign diplomacy to tax incentives. One area that may soon be altered is an increase in the capital gains tax rate. What is this potential increase? Will it impact your Houston estate plan? And should you take action now before any new policy is put in place? Below are some common questions that Texans are asking in light of Biden’s election, specifically regarding capital gains tax considerations.
What is a Capital Gains Tax, and What Has Biden Proposed?
A capital gains tax is a tax on the growth of investments that an individual or corporation must pay when selling those investments. This means that the tax does not apply until an investment or stock shares are sold; however, capital gains taxes will incur every year until the investment is sold. The capital gains tax rate only applies to “long term capital gains,” which are assets held for more than a year.
The current capital gains rate is 23.8%. This number is broken down further into a 20% tax rate for individuals with capital gains over $434,550, plus a 3.8% net investment income tax for earners above a certain threshold. The rate is lower for people who make under $434,000. President-elect Biden previously proposed increasing the capital gains tax rate for individuals earning over $1 million to $39.6%.
Should Texans Liquidate Their Portfolio?
Certain clients wonder whether they should liquidate their portfolio to lock in a 23.8% capital gains rate now. While this may seem advisable for certain individuals, this is recommendable only for assets someone was planning on selling in the next year or two anyway – either to rebalance a portfolio or fund cash-flow needs. For most, liquidating now is not the right move to make. Making a permanent decision solely based on the current tax rate is not advisable when the tax rate is already known to change constantly.
According to financial advisors and estate planning and tax attorneys, an individual’s course of action should depend on many factors, including their income, the amount of money they need to live on, the composition of their assets, and their comfort level. Even if individuals do not want to make drastic changes right now, it is important to know what may occur in the future and what their options are. For individuals who are unsure about future capital gains alterations – and how it will impact them – experienced estate planning attorneys are here to help.
Will I be Affected by a Change to Capital Gains Taxes?
If you or a loved one is worried about how potential changes to capital gains taxes will impact you, contact the Houston estate planning attorneys at McCulloch & Miller, PLLC. Our attorneys stay up to date on any relevant changes to the U.S. tax incentives and provide our clients with detailed guidance, so they can make the decision that is right for them. To talk to an attorney and schedule a consultation, contact us today at 713-333-8900.