Marc Greene from General Insurance Brokerage refers to Merrill Lynch Research and has some recommendations. If you have not spoken to your CPA or Tax Attorney, let me break down some of what is inside Biden’s proposal to hike taxes.
Regarding the Capital Gains Tax, the administration will propose raising the federal long-term capital gains tax from 20% to 39.6% along with the Obamacare 3.8% surcharge on net investment income, which will increase the total tax rate from 23.8% to 43.4%. The increased tax rates will also apply to qualified dividends, which are currently taxed at the same preferential rate as long-term capital gains. Targeted investors are those households earning over $1 million in the year they occur a capital gain.
Other individual income changes being targeted by the Biden administration include eliminating the step-up in cost basis on inherited assets; cutting the estate-tax exemption from $11.7 million to $3.5 million; raising the top marginal income tax rate to 39.6% from its current 37% along with curtailing the benefit of itemized deductions for taxpayers making more than $400,000; the elimination of the effective 1031 exchange for Real Estate; and imposing Social Security taxes on wage income over $400,000 at current rates (6.2% for employee and employer).
History suggests that there will be a tailwind for selling appreciated assets in 2021 and some of those sales will be brought forward, creating a potential drag on equities, although the downside effects, historically, are expected to be minimal and limited. Yes, equities do tend to consolidate and decline in the run-up to a tax hike, but not only are these declines short-lived but also have been followed by reversals and significant market gains.
Marc can give you more insight into the tax consequence of your Independent Insurance Agency’s valuation and if now is the right time to sell.