President Joe Biden‘s newly launched American Family Plan is based on specific ideas, such as universal preschool, two free years of community college, and paid parental leave. It’s also packed full of details on the ways Biden would fund the $ 1.8 trillion proposal, including a new top income tax rate, an increased capital gains rate for millionaires, and the additional IRS enforcement of scoffers. prosecutors.
Wealthy taxpayers and their financial planners have already been bracing for the prospect of more taxes and more audits during the Biden administration, but a big question arises: What will be the effective date for any tax law changes? Details of the plan released Wednesday by the White House did nothing to erase that question. That is important to wealthy people and their advisers. But it’s also potentially important to investors and even blank check firms looking to get businesses to buy. Of course, it would be quite difficult for the White House to say with certainty now what the effective dates would be. The American Families Plan is at the beginning of the legislative process and its final content and tax rates, let alone its approval, are not guaranteed. “We would like it to be approved as soon as possible,” said a senior administration official, briefing reporters on Biden’s new proposal. “All this begins with the step,” added the official. Biden’s proposal would put the top income tax rate back at 39.6%, the rate before Trump‘s 2017 tax cuts lowered it to 37%. Households making more than $ 1 million would have a 39.6% capital gains tax, plus a pre-existing 3.8% tax tied to the Affordable Care Act. Right now, top earners pay a 20% capital gains tax when they sell an investment security that they have owned for at least one year. Until an effective date is known, these investors do not have a sale deadline if they want to pay a lower tax rate. There could be a $ 178 billion market sell-off before any capital gains increase, according to one estimate. It’s common for high-net-worth individuals to maintain a kind of “capital gains budget” to prepare for any surprises on the tax bill, explained Ali Hutchinson, managing director of Brown Brothers Harriman, a private bank with a super-wealthy clientele. . “If you don’t know the timing and the percentage, who can manage customer expectations of what to save for capital gains next year?” she said. Biden also wants to end the “progressive basis” for earnings in excess of $ 1 million, or $ 2.5 million for married couples. When an asset, such as stocks, artwork, or other property that gains in value, is transferred to an heir, it is reinstated for capital gains tax purposes. If the heir sells the asset, the tax is calculated based on the increase in value since the heir acquired it, not when he originally acquired it. That allows heirs to dodge a host of potential capital gains taxes on something that has increased dramatically in value over the generations. “The previous plan was a simple plan. It did not require an accountant. It was dying with it, ”Hutchinson said. But if lawmakers reject the increase, Hutchinson said, older investors may need to think about selling and potentially diversifying to avoid passing a tax bill. But, again, they lack a clear timetable on when to act, he noted. The White House materials say the proposed changes to the escalation rules will include “protections so that family businesses and farms do not have to pay taxes when handed over to heirs who continue to run the business.” Hutchinson’s clients can no longer stop thinking about how that might apply to their own family businesses, he said. If there is a liquidation in the market before the tax law changes, there could be buyers. Wealthy investors have plenty of cash and are increasingly willing to increase their exposure to the stock market, a new survey from UBS shows. Meanwhile, a new generation of young retail investors could also be hunting for bargains if any liquidation induced by a tax strategy creates buying opportunities. Capital asset sales have been ahead of previous increases in capital gains rates. Sales or “realizations” of capital gains increased 60% in fiscal 1986 before a 1987 rate hike, according to research by the Joint Committee on Taxation Taxes and the Center for Fiscal Policy, a nonpartisan committee. of the United States Congress. Sales were up 40% before a rate hike in 2013. There’s an interesting mix of market ingredients this time around, Hutchinson said. Special purpose procurement companies “maintain liquidity funds and seek acquisitions,” he said. None of his business-owner clients want to sell just because of the prospect of more taxes, Hutchinson said. But for anyone already inclined, the possibility of higher capital gains rates without a raise is a powerful push. “If you were already thinking it was time, why not speed it up to 2021, instead of 2022?” Hutchinson said. “And there are buyers, there is liquidity.”