Vice President Kamala Harris has recently proposed an increase in the capital gains tax rate, specifically targeting households with an annual income of over $1 million. The suggested rate of 28% on long-term capital gains assets owned for more than a year is a significant jump from the current 20% rate applicable to top earners. Her vision is to tax capital gains in a way that supports investment in America’s innovators, founders, and small businesses, as mentioned during a campaign event in New Hampshire. Compared to President Joe Biden’s plan, Harris’ proposed rate is lower than the 39.6% suggested by Biden for the fiscal year 2025 budget. However, it is crucial to note that both Harris’ and Biden’s tax plans would require congressional approval.
Under the current tax system, investors pay varying rates of 0%, 15%, or 20% for long-term capital gains, along with an additional 3.8% net investment income tax (NIIT) when their modified adjusted gross income (MAGI) surpasses specific thresholds. Harris’ proposal includes an increase in the NIIT to 5%, as reported by The Wall Street Journal. Moreover, assets owned for a year or less are subject to regular income tax rates, which could potentially increase post-2025 without legislative action. Financial advisors are advising their clients, particularly high-income earners, to refrain from making any immediate alterations until the proposed tax law is officially passed. Knee-jerk reactions to evolving tax policies can have unforeseen consequences, emphasizing the importance of staying informed and seeking professional guidance.
Although former President Donald Trump has advocated for tax cuts, he has not presented a specific capital gains tax proposal. The Heritage Foundation’s Project 2025, endorsed by numerous conservative organizations, proposed a capital gains rate of 15% for higher earners while calling for the abolition of the NIIT. However, former Trump officials associated with the project have not received explicit support from Trump himself. Biden’s plan targets taxable income exceeding $1 million per year, also considering inflation adjustments. Despite focusing on top earners, the potential impact of the proposed tax hike extends to lower-income individuals navigating one-time sales of businesses or commercial properties, necessitating strategic tax planning, especially for aging individuals looking to sell lucrative assets.
Financial experts suggest that timing plays a crucial role in navigating the implications of the proposed capital gains tax increase. Biden’s proposed rate would apply solely to capital earnings surpassing the $1 million threshold, leaving room for certain strategies to minimize yearly income and offset the higher tax rate. Utilizing capital losses carried forward from previous years is one such approach recommended by professionals. With the current market conditions and individual asset performance providing opportunities for tax-loss harvesting, investors are urged to assess their portfolios and financial situations to optimize tax outcomes and long-term financial goals. As uncertainties loom surrounding the future of tax legislation, proactive planning and informed decision-making become indispensable for individuals aiming to navigate the evolving tax landscape effectively.