Changes to Capital Gains Tax
Hey Profit Boss, it’s Hilary, and I usually don’t give September 13th a second thought.
This year, though?
It was a particularly bad day because it’ll make many of us a little bit poorer.
What’s wrong with September 13th, you ask?
Let’s set the stage: President Biden’s new tax laws are coming out. They cover far more than the topic of today’s email, and we’ll be updating you on more of the details as they are finalized, but here’s what you need to know today:
Higher taxes on capital gains are here.
The top long-term capital gains bracket will be increased from its current 20% to 25% for those already in the highest tax bracket. (That’s an important distinction.)
You may be reading this thinking, “But, Hilary, I’m not in the top tax bracket. I’m close, but not quite at the top yet.”
Income thresholds for the top capital gains bracket will be lowered – bumping more people up into the top bracket.
Individuals earning $400,000 and married couples earning $450,000 will now be in the top capital gains tax bracket. This means you may see your long-term capital gains rates go from 15% to 25%.
The final detail? This is all retroactive back to September 13th, 2021.
Here’s an example of how this might play out:
If you and your spouse are earning $250,000 each and you sell your home in California in November 2021, you’ll likely have significant gains in your home. Congratulations! Let’s say you bought the home you live in for $650,000 and you sell it for $1,500,000. Again, wow, good job!
Even after the $500,000 marital gains exclusion, you still have $350,000 of taxable gains and therefore $750,000 of taxable income (your combined job income equals $500,000 plus $350,000 of taxable gains = $750,000).
You may have been preparing for a tax bill of $69,000 (15% of $26,000 and 20% of $324,000). Instead, though, under the new capital gains rules, your real bill is $87,500 (25% of $350,000). And that’s just capital gains tax on the federal level, let alone the Net Investment Income Tax and the state taxes, which could be very high, especially if you live in California or New York.
So just be aware of this when you are selling appreciated stocks, investments, businesses, or homes without knowing what your tax rate will be for 2021.
So, what’s one step you can take today to protect against paying unnecessary capital gains taxes? Talk with your tax preparer or financial advisor.
And if your financial advisor doesn’t understand capital gains tax implications, I happen to know a group of advisors who does. *hint, hint*
To your prosperity,
Hilary
