Democratic presidential candidate Vice President Kamala Harris arrives at Portsmouth International Airport in Portsmouth, New Hampshire, Sept. 4, 2024.
Joseph Prezioso | AFP | Getty Images
‘We don’t make any changes until the law has passed’
Currently, investors pay 0%, 15% or 20% for long-term capital gains, plus an extra 3.8% net investment income tax, or NIIT, once modified adjusted gross income, or MAGI, exceeds $200,000 for single filers or $250,000 for married couples filing together. Harris’ plan would also increase the NIIT to 5%, The Wall Street Journal reported Wednesday.
Profitable assets owned for one year or less are subject to regular income tax rates, which will increase after 2025 without action from Congress.
Both Biden’s and Harris’ tax proposals would require congressional approval. But with future control of the Senate and the House uncertain, many financial advisors are monitoring plans before taking action.
“We don’t make any changes until the law has passed,” said certified financial planner and enrolled agent Louis Barajas, who is CEO of International Private Wealth Advisors in Irvine, California.
“I think there are sometimes knee-jerk reactions to some of these proposals,” added Barajas, who is a member of CNBC’s Financial Advisor Council.
Although former President Donald Trump has voiced broad support for tax cuts, he has not outlined a capital gains tax proposal.
The topic was addressed in Project 2025, a “vision for a conservative administration” created by conservative think tank The Heritage Foundation with more than 100 other right-leaning organizations.
Project 2025 called for capital gains and qualified dividends to be levied at 15% for higher earners. The plan would also abolish the NIIT.
Several former Trump officials have been directly affiliated with Project 2025, but Trump has distanced himself from the plan.
Who could be hit with higher capital gains taxes
Biden’s proposed higher capital gains taxes would apply to taxable income of more than $1 million per year, or $500,000 for married couples filing separately, according to the U.S. Department of the Treasury. Those amounts would be indexed for inflation.
However, the proposed higher capital gains tax could also affect lower earners with a one-time sale of a business or commercial property, experts say.
“There will be more tax planning, especially for people who are maybe in their 60s and 70s, who have rental properties and want to sell them,” Barajas said. But timing a sale, depending on other income, could affect the bottom line.
Biden’s higher capital gains rate would apply only to capital earnings above the $1 million threshold. For example, if someone has $1.1 million of taxable income and $200,000 of that is capital gains, they would owe the higher rate on $100,000, according to the Treasury.
“If somebody is over the $1 million, it could easily be from a number of different sources,” such as stock sales and required minimum distributions, said CFP John Chichester Jr., founder and CEO of Chichester Financial Group in Phoenix. He is also a certified public accountant.
But there are several ways to reduce your yearly income and avoid the higher tax rate, such as using capital losses carried over from previous years, he said. As of Sept. 5, the S&P 500 was up more than 16% year to date, but some individual assets could provide tax-loss harvesting opportunities.