May 3, 2021

This is a very large proposal that encompasses many issues, not just increases of certain tax rates. As financial advisors and planners, we are focused on how the proposed tax increases may impact our clients.

  • This is only proposed legislation. It is a wish list from the administration. This still must go through Congress before any tax increases take effect. It is not a surprise that Republican leaders are against this legislation but there are also some Democratic leaders raising concerns. The final legislation will probably look different and hopefully will not have as dramatic changes.
  • Proposed change to capital gains rates for those with incomes of more than $1,000,000. Capital gains will be taxed as regular income, at 39.6% up from 20%.
  • Raise income tax rate on top bracket from 37% to 39.6%. Reports and details being released show that this would include individuals earning at least $452,700 and married couples earning more than $509,300 in 2022.
  • Repeal of the tax adjustment known as step-up in basis for assets that pass to beneficiaries. This long-standing practice allows the cost of assets to ‘reset’ to current market value when they are passed to heirs rather than the initial price paid years before.
    This will tax those gains more than $1 million ($2.5 million per couple when combined with existing real estate exemptions). Family-owned businesses and farms will be excluded from paying taxes when given to heirs who continue to run the business.


What should the investor or business owner do now?

Now is the time to talk to your financial advisor to explore different scenarios based on your financial plan and on expected outcomes of the tax changes. With so many details for Congress and the White House to work out, it will probably be a few months before it is signed into law. Having several scenarios based on your financial plan and likely outcomes of the tax increases will make any decision easier once the bill is passed into law. It is best to be prepared now.

Now is not the time to make decisions based on emotion and the noise created by the financial media outlets. This is the perfect time to “Tune out the noise” and make sound decisions based on your individual situation.

If you are a business owner or investor that may be impacted by these new tax changes and you need a financial plan, we can help you at Prato Capital. Our clients have received personalized advice in situations like this for over 25 years to help them better prepare for the future.

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