Navigating Potential Changes in Capital Gains Tax: What Business Owners and Boomers Need to Know

As a business owner or a baby boomer planning to sell your business or a significant real estate asset, understanding potential changes in capital gains tax is crucial. President Biden's FY 2025 budget proposal includes considerable tax reforms aimed at wealthier taxpayers, which could impact your financial planning. While these proposals are not yet law, being informed and prepared can help you navigate potential changes effectively.

Biden's Capital Gains Tax Proposal

The capital gains tax rate for long-term capital gains—assets held for over one year—is currently capped at 20%. However, President Biden's budget proposal aims to nearly double this rate to 39.6% for individuals earning at least one million dollars annually. This proposed increase is part of a broader effort to ensure wealthier taxpayers contribute a "fairer" share of federal revenues.

A separate proposal could also push the capital gains tax rate to 44.6% for those with high net investment and taxable income. This rate includes an increase in the net investment income tax rate to 5% above the $400,000 threshold, combined with an increased top ordinary income tax rate of 39.6%.

Implications for Business Owners and Real Estate Investors

If you are planning to sell a business or a significant real estate asset, these proposed changes could significantly impact your tax liabilities. Here are some key considerations:

1. Timing of the Sale: If the proposed tax increases become law, selling your assets before the changes take effect could save you substantial taxes. However, this requires careful planning and consideration of market conditions.

2. Estate Planning: The proposal also includes changes to the "stepped-up basis" rule, which allows heirs to inherit assets at their fair market value at the time of the decedent's death, minimizing capital gains taxes. Under the new proposal, gains exceeding $5 million per person and $10 million per married couple would be taxed if the property is not donated to charity. This change could affect your estate planning strategies, especially if you intend to pass down significant assets to your heirs.

3. Carried Interest Loophole: The Biden administration aims to close the carried interest loophole, which allows asset managers to treat specific compensation as capital gains rather than ordinary income. This change would mean higher taxes on this type of income, impacting those in the investment management industry.

4. Medicare Tax Increase: Another aspect of the proposal is an increase in the Medicare surtax rate from 3.8% to 5% for individuals earning more than $400,000 annually. This increase would apply to wages, salary, and capital gains, further affecting high-income earners.

Planning Approaches

Given the potential for these changes, here are some planning approaches to consider:

1. Consult with Our Office: Engage with our experts to understand how these proposed changes could impact your situation. We can help you develop strategies to minimize your tax liabilities.

2. Evaluate Timing: Assess the timing of your asset sales. If you are considering selling a business or real estate, doing so before any tax changes take effect could be beneficial.

3. Review Estate Plans: Revisit your estate planning documents and strategies. Consider the implications of the proposed changes to the stepped-up basis rule and explore options such as charitable donations to mitigate tax impacts.

4. Stay Informed: Keep abreast of legislative developments. The political landscape can change, and staying informed will help you make timely and informed decisions.

The Future

While President Biden's proposed tax changes are not yet law, they signal a potential shift in the tax landscape that could significantly impact business owners and real estate investors. By understanding these proposals and proactively planning, you can better navigate the uncertainties and position yourself for financial success.

Always consult with our office to tailor strategies to your unique circumstances and stay informed about legislative developments that could affect your financial planning.