What Changed with Capital Gains Tax?
Investors anticipated tax changes when Joe Biden became president of the United States. On April 28, 2022, he introduced changes that would potentially make it harder for high-earning investors to save by increasing their tax responsibility. There are ways to combat this change, but it’s essential to know who this is targeting. What does that change look like? How is this affecting our wealthy clients? Let’s take a look at what is happening with capital gains tax in the US this year.
A short look at capital gains tax
Income that is earned through selling investment assets is subject to capital gains tax in the United States. The rate at which individuals and corporations are taxed on their capital gains depends on their tax bracket and how long the investment has been held. Investments held for a short term, less than a year, are taxed at a higher rate than those held for a longer time. This incentives investors to hold them longer, allowing them to appreciate. Historically, capital gains tax has sat around 20%. There are exceptions to this, such as when it was 15% from 2004 to 2012. There is a change on the horizon, which can take place as soon as 2023.
Higher tax rate
Currently, the capital gains tax rate for wealthy investors sits at 20%. The proposal is bumping this up to 39.6%. Joe Biden says this tax increase funds a 1.8 trillion dollar plan to fund education and childcare. This means that some investors face a tax responsibility as high as 43.4%, reversing a historic provision of the tax code that taxed investment income less than the income earned through labor.
High earning investors are at risk
This change will not affect all investors, but high-earning investors, those with an income of $1 million or more annually, are being targeted by this tax proposal. These investors are already subject to a 3.8% Medicare surtax on investment income. While Joe Biden has claimed there will not be any change for those who make less than $400,000 per year; there are still details missing in the plan. There is potential for a change in itemized deductions and phase-outs. Also, who knows when the next proposal will be made? Anyone who has earnings in the higher six-figure range should be concerned with a tax increase. There could be a severe change that would include any wealthy investors.
A tax increase will make it harder for our US clients and those that invest in the country to grow their wealth.
How you can fight capital gains change
A lot of investors are scrambling to find a remedy for this tax treatment. Some are considering selling off some of their assets because of this tax spike. For guidance on how to protect your earnings, optimize your tax responsibility, and keep saving, we recommend reaching out to our professionals to create a personalized investment plan. Alpen Partners works with wealthy investors to do exactly this and more. In the meantime, let’s take a brief look at how some investors are easing their concerns. Even before the tax proposal, US investors have been working hard to save.
Some investors seek out offshore investment for tax benefits. These incentives benefit the investor and encourage the growth of their own economy by attracting wealth from other countries. There are so many more benefits to offshore investing other than tax benefits. Investors can tap into markets they never thought they’d have access to when they start looking outside of their own jurisdiction. They can also take advantage of banking systems that are far better for wealthy investors when they invest in certain countries.
Relocating and Expatriating
If you are going to place your money to make investments abroad, why stop there? Wealthy investors who primarily make their income through investments are releasing themselves from the tax burden of the United States completely and are moving to jurisdictions that are investor-friendly and even offer incentives to high-income investors. Why live where you will have to constantly fight to protect your assets and wealth by paying rising capital gains tax? Some investors will expatriate completely and renounce citizenship. Then, they are longer subject to the tax laws of their home jurisdiction and can enjoy life without the hassle of being taxed on money that you may not even be making in your home country.
Restructure your investments
There is potential that your investments are at risk of unfair tax treatment with no protection. There are ways to structure your investments that are designed to help investors save. For example, many of our clients, even our international clients, utilize trusts and insurance policies to save on their US investments. A US trust can even hold foreign assets. Trusts and insurance policies are especially appealing when creating estate plans. A trust can be used to gain more control over assets than with a standard will. We recommend looking into creating a trust even if you aren’t worried about the implications of Joe Biden’s tax proposal.
Continue tracking your portfolio and tax changes
If you are unsure if this tax change affects you, it is a smart idea to do your research. Keep track of ongoing tax changes. Keep an eye on your portfolio to ensure tax legislation isn’t going to stop you from protecting your income. Even if you don’t feel like these changes could affect you, contact Alpen Partners to take a look at your assets. We can talk to you about your goals and create a plan that will protect them from future or current changes.
Fight Capital Gains Tax Change with Alpen Partners
If you think this change could mess up your investment plans, it’s never too early to begin fighting against a surge in tax responsibility. We are well-versed in combatting high tax treatment for high net worth investors. We have the tools and knowledge to ensure you are saving the most on taxes. Alpen Partners can help you in every step of your financial and personal planning. Contact us now to find out more!
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