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Thursday, June 13, 2024

Op-ed: Here’s how to position your portfolio today for higher taxes

  • To help fund the American Families Plan, the Biden Administration has proposed increasing capital gains taxes to 43.4% for those making more than $1 million a year.
  • While politicians haggle over eventual tax legislation, high-net-worth investors should evaluate steps to plan for higher taxes.
  • Here are three strategies to consider.

boonchai wedmakawand | Moment | Getty Images

While it's not guaranteed that taxes are going up for wealthy Americans, it does look likely.

To help fund the American Families Plan, the Biden Administration has proposed increasing capital gains taxes to 43.4%, including the net investment income surtax of 3.8%, from 23.8% for those who are making more than $1 million a year.

Additionally, the current estate, gift and generation skipping transfer tax exemption of $11.7 million is scheduled to drop by half to $5 million (inflation adjusted) at the end of 2025. However, Sen. Bernie Sanders, I-Vt., has proposed this amount be lowered to a $3.5 million exemption.

Any of these changes will make it much more difficult for those with large sums of wealth to transfer it to their beneficiaries in a tax-efficient manner.

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While politicians on Capitol Hill haggle over the details of the final tax legislation, it behooves all high-net-worth investors to evaluate proactive steps to plan for a world with higher taxes. Here are three strategies to consider today.

Capital gains recognition: Someone with large gains in their portfolio may consider recognizing the gains now in order to potentially lock in the lower capital gain tax rate of 23.8%. It's important to note that if the Biden tax proposal is enacted in its current form, investors will be hit with the higher tax rate retroactively as of April 2021.

But the solution for many will be to time gains over several years to stay below the $1 million income threshold where the higher capital gains rates apply.

A better strategy may be to comb through your accounts for investments that have been duds. Investors with a diversified portfolio likely have some positions that have underperformed. They've been sitting in your account for years.

Now may be a good opportunity to recognize the losses, utilizing them to help offset large capital gains and avoid the higher tax rate on some of their investments.

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