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Tax Preperation

Preparing for Possible New Tax Initiatives

By May 20, 2021January 29th, 2024No Comments

With the proposed tax legislation making its way through Washington, we wanted to discuss some possible actions to take to minimize the impact on your individual tax situation. As a reminder, our Texas, Oklahoma and Louisiana clients tax deadline has been moved to June 15th due to the winter storm we experienced earlier this year. 

Tax Proposal to Raise the Top Tax Rate

President Biden has advocated raising the top individual ordinary tax rate to 39.6%, up from the current 37%. This rate would apply to people making more than $400,000 per year. With this in mind, clients may want to accelerate short-term income into 2021, while pushing out deductions and expenses to 2022. This would effectively increase the value of the deductions at a higher rate, and decrease the effective tax on income by pushing it into a lower tax rate year. 

Tax Proposal to Raise the Capital Gains Rates

President Biden’s tax plan also includes basically doubling the capital gains rate on people who make over $1 million. The current maximum rate is 20%, and the proposal would take this rate to 39.6%. We think that 39.6% is a worst-case scenario, and as these tax changes work through Washington it is likely we will end up closer to a rate of 25-30%. With this in mind, many clients may be looking to liquidate unrealized gains now, so as to avoid paying a major increase in tax. While this is a good strategy, clients need to also be conscious of the threshold that this rate increase will apply to (those making over $1 million). Although you may currently be subject to these rates, if your long-term goals and retirement timelines will see your income drop below that threshold, it may not be worth realizing these gains immediately. It is always a good idea to keep your long-term goals in perspective while also keeping an eye on tax rates.

If you would be interested in looking at these scenarios on a specific basis for your own investments and goals, please don’t hesitate to reach out to us. 

We will continue to keep our finger on the pulse of these changes and work to relay them to you. We will also be working to better understand all of the coming changes, and incorporate them into our tax planning for our clients.