Capital gains could be raised substantially. They have discussed doubling the tax on capital gains by taxing capital gains as ordinary income. It could even be worse as those gains could be subject to the 3.8% net investment income tax. Add to that state income tax if you live in a high tax state. The effective tax on capital gains over $1 million could exceed 50%. If this is enacted prospectively expect a tremendous amount of sales of assets before the effective date of that change.
Some commentators have speculated that a capital gains tax could also be made retroactive to January 1, 2021, but many think that is unlikely. Others suggest that such a change might be made effective January 1, 2022. Or there could be an effective date based on the date of enactment of the tax legislation. This will affect planning dramatically. It might prove to be advantageous to sell appreciated assets now and lock in the current capital gains tax rate.
If you sell assets on the installment basis you would pay tax when the proceeds received. You might instead prefer to elect out of the installment sale treatment for income tax purposes so that you have a gain recognized at the current and perhaps lower capital gains rate.
A common income (and estate) tax planning technique is the use of a charitable remainder trust or “CRT.” With a CRT you can donate appreciated stock to a CRT. The CRT can sell the stock without realizing gain since CRTs are tax exempt. As you receive your periodic payments from the CRT (e.g., a unitrust payment) the payments to you will flow out income from the CRT to you. In other words, the cash flow distributed by the CRT to you as part of your periodic payments will be characterized based on the income earned by the CRT. So, if your CRT sold appreciated stock and realized a capital gain, that gain would flow out to you over many future years. If the capital gains tax rate is increased in those future years, using a CRT today might effectively defer your realization of capital gains income to later years when the tax rate is higher.
In next blogpost, we will discuss should you sell assets before capital gain tax rates increase.