What a capital gains tax hike could mean for your high net worth clients
What would you like to know
- President Biden is expected to propose a 43.4% capital gains tax rate for investor income over $ 1 million.
- Such a tax hike – more than double the current rate – could affect portfolios, charitable giving, tax planning and more.
- This could encourage more high net worth investors in high tax states to relocate.
President Joe Biden is expected to announce his U.S. Family Tax Plan on Wednesday, which will likely include not only a proposal to increase the top marginal tax rate for those earning more than $ 400,000, but also an increase in the top marginal tax rate for those earning more than $ 400,000. capital gains tax for investors earning more than $ 1. million a year.
The top marginal tax rate is expected to drop from 37% to 39.6%, and the top capital gains rate even higher, 43.4%, from 23.8% to 43.4%. This higher capital gains tax rate, comprising a capital gains rate of 39.6% and the Medicare surcharge of 3.8%, would affect many high net worth clients of financial advisers.
The White House said the increase would only affect about 0.3% to 0.5% of all U.S. taxpayers.
ThinkAdvisor spoke to several experts about the potential spinoffs of an increase in the capital gains tax for high net worth clients of financial advisers, including Peter Mallouk, president of Creative Planning, which has $ 76 billion in business. assets under management; Megan Gorman, Founder and Managing Partner of Checkers Financial Management, a specialty financial advisory firm with nearly $ 500 million in assets under management; and John Mousseau, President, CEO and Director of Fixed Income at Cumberland Advisors, which designs personalized investment portfolios for individuals and institutions.
They discussed the impact on portfolios, tax planning, charitable giving, business planning and moves.
Mallouk said the capital gains tax increase for high net worth investors could “devastate” high turnover investments such as hedge funds while simultaneously stimulating more direct giving to funds advised by donors, which could be “out of the ordinary”.
CFOs are already popular among high net worth taxpayers in part because they accept valued assets in the form of donations, which helps taxpayers avoid capital gains on those contributions and therefore allows them to contribute even more money.
The Biden administration, however, could propose changes in how quickly CFOs distribute their contributions to charities, which a broad coalition of philanthropists, leaders of major foundations, nonprofits and d ‘others claim.
Gorman said the increase in capital gains for high net worth investors could stimulate more investment in Opportunity Zone funds, allowing investors to defer capital gains if they are invested in the 180 days and eliminate them as well as any new gain from the investment in the opportunity area if the investment is held for 10 years.
Rules for investing in Opportunity Zones, which failed to deliver on their promise to revive low-income neighborhoods and create jobs, could also change under the Biden administration.
Demand for municipal bonds could also increase if the capital gains tax hike for high net worth investors is implemented, although the main tax benefit for munis is exemption from their interest payments. income tax.
“Wealthy investors vote with their portfolio,” Mousseau said. “They feel higher income taxes and a higher overall rate when you add in an increase in capital gains taxes.”
But favoring one asset class over another isn’t the only impact on the portfolio of rising capital gains taxes. “The location of the assets would also be affected,” Gorman said.
She expects that an increase in capital gains will shift high dividend-paying investments into tax-efficient accounts like traditional IRAs, Roth IRAs, and 401 (k) plans, as wealthy investors continue to convert them. Traditional IRA in Roth IRA. Gorman also advises his wealthy clients to fund Roth 401 (k) plans outright and use backdoor Roths, converting a traditional IRA to a Roth because their income exceeds the threshold for opening a Roth. IRA directly.