Vice President Kamala Harris recently announced a proposal to increase the capital gains tax rate to 28% for households making over $1 million annually. This potential tax hike has sparked discussions among financial advisors and top earners regarding its impact on investments and financial planning strategies.
While Harris’ proposed tax rate is lower than the 39.6% rate suggested in President Joe Biden’s fiscal year 2025 budget, both plans aim to increase taxes on top earners. Harris’ campaign has emphasized the importance of encouraging investments in American innovators, founders, and small businesses through this tax policy.
Current Tax Structure for Investors
Currently, investors pay 0%, 15%, or 20% for long-term capital gains depending on their income level. In addition, there is an extra 3.8% net investment income tax (NIIT) once modified adjusted gross income exceeds certain thresholds. Harris’ plan includes an increase in the NIIT to 5%, which could further impact high-income investors.
Financial advisors are closely monitoring both Harris’ and Biden’s tax proposals while waiting for Congressional approval. Louis Barajas, a certified financial planner, highlighted the importance of not making hasty decisions based on proposed tax changes until they become law. This cautious approach is common among advisors uncertain about the future control of the Senate and the House.
The proposed increase in capital gains taxes could affect not only top earners but also lower earners with one-time capital gains from business or property sales. Aging individuals with rental properties looking to sell may need to engage in more tax planning to navigate the potential impact of these tax changes on their financial situation.
As experts suggest that timing a sale based on other income sources can affect the final tax liability, individuals may need to explore ways to reduce their yearly income to avoid higher tax rates. Utilizing capital losses carried over from previous years and considering tax-loss harvesting opportunities could be effective strategies for minimizing tax burdens under the new proposed tax structure.
The proposed capital gains tax increase comes at a time when the stock market, as represented by the S&P 500, has shown significant gains year-to-date. However, individual assets may provide opportunities for tax-efficient investment strategies despite the potential tax implications of the new proposed tax rates.
Vice President Kamala Harris’ proposed capital gains tax increase has sparked debate and speculation among financial advisors and high-income earners regarding its potential impact on investments and financial planning. While the exact implementation of the proposed tax changes is uncertain, individuals are encouraged to stay informed about their tax implications and explore effective tax planning strategies to navigate these potential changes successfully.