Capital gains tax – 2021 tax reform

Capital gains tax could double in 2021 or 2022. Currently, the top federal tax rate is 23.8% and could jump to 43.4% under the latest tax proposal. At the end of this post, I share a free calculator that will show you the cost difference.

President Biden’s team released details related to the American Families Plan. You can access the entire fact sheet by clicking here.

Tax reform has a long way to go before it becomes law. What we see in the current fact sheet is likely to change.

One of the most talked about tax changes is related to the capital gains tax rate. This has gotten the most press because of the amount it has changed.

The target of this change are households with $1 Million or more in Adjusted Gross Income (AGI). Whether that means single or married taxpayers remains unknown. As of now it appears if you have $1 Million or more of AGI, then prepare for the higher tax rate.

Another unknown is whether it becomes a 2021 tax change or 2022. My bet is that it becomes a 2022 tax change. This means there is time in 2021 to take advantage of the lower tax rate.

Who should accelerate capital gains into 2021?

First of all… if you won’t have more than $1 Million of AGI in 2021 then don’t make any bold moves yet.

If you have more than $1 Million of AGI AND have significant unrealized gains in your portfolio then you should start planning.

The key is to start planning… be ready to take action. Don’t sell out of fear. If they make it retroactive to January 1, 2021, then you might be better off holding.

With those caveats out the way… here is who should CONSIDER accelerating gains into 2021:

1. You plan on selling your asset sometime in 2022 anyway. Why risk waiting?
   • Examples:
     • Low-basis company stock (executives, stock options, RSUs, etc)
     • Business owners selling their business
     • Real estate investor selling properties

2. You were relying on the step-up in basis at your death

3. The only reason you haven’t sold the asset is because you didn’t want to pay the tax

4. You ran the numbers in the calculator below and it makes sense for your wealth plan

Elimination of the Step-Up in Basis – A deadly combination

Another provision in the bill is the elimination of the step-up in basis.

Under the current tax law when you sell an asset while alive you pay tax on the “growth.”

Under the current tax law when you die, the “basis” becomes equal to the asset’s value at your death.

• Purchase Price: $100,000
• Asset grows to $1,100,000
• Asset value at death = $1,100,000
• Asset is sold and $0 tax is due on the $0 of growth.

The proposed law would eliminate the step-up in basis. Since that’s good enough, it would also make death a recognition event. This means at death the gain on the asset is taxed whether you sell it or not.

• Purchase Price: $100,000
• Asset grows to $1,100,000
• At death, the estate owes tax on the $1,000,000 of growth.

This is why the removal of a step-up in basis and increased capital gains rate becomes a deadly combination.

Taxpayers who were never subject to the top capital gains tax rate quickly jump there at their death.

Keeping your favorite stock because you never wanted to pay tax on it may no be longer viable.

How much do you love that stock now that it’s a tax time bomb?

We will wait and see how everything comes together. The future remains unknown.

What is certain is that you need to start planning. To help you, I created a worksheet for you to run the numbers. It’s free to use. Please share your feedback to improve it or celebrate it.

2021 Capital Gain Recognition Calculator