Selling assets to avoid higher capital gains tax may trigger another tax

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Investors fearful of President Joe Biden’s proposal to levy taxes on capital gains might consider a tricky stock sale.

According to financial advisors, this can accidentally trigger another investment tax. And it’s one that has a low income compared to Biden’s plan.

“You could get into a situation where you sell everything to avoid the capital gain rate and end up paying that extra tax,” said Leon LaBrecque, accountant and certified financial planner with Sequoia Financial Group in Troy. Michigan.

3.8% Medicare surcharge

The additional tax is a Medicare surcharge of 3.8% on investment income – such as profits from the sale of stocks, bonds, and mutual funds.

It went into effect in 2013 to fund Medicare’s expansion under the Affordable Care Act.

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The levy applies to individual taxpayers with modified gross adjusted income greater than $ 200,000 and to married couples who jointly submit income greater than $ 250,000. (The thresholds are not indexed annually for inflation.)

According to the IRS, around 5 million taxpayers paid the surcharge in 2018. The tax brought in $ 30 billion.

Proposal for the taxation of investment income

Meanwhile, Biden is proposing a higher top tax rate on long-term capital gains – 39.6% versus 20% today – to help fund the $ 1.8 trillion plan for American families.

This maximum rate would apply to households with an annual income of more than $ 1 million.

However, less wealthy investors who quickly decide to sell their holdings could push their income past the Medicare surcharge in 2021. They would pay an additional 3.8% tax on their investment income.

“I think a lot of people are likely to take it to their knees, and they’re probably not people who are making more than $ 1 million,” LaBrecque said.

However, some advisors believe that asset sales are likely to be largely restricted to millionaires who are already subject to the 3.8% tax. In this case, the additional sale would not generate any additional tax.

“I don’t know it’s overly affecting me,” said Jeffrey Levine, CFP, accountant and chief planning officer at Buckingham Wealth Partners in Long Island, New York.

“Those who are so concerned about capital gains they want to sell now to avoid a future increase are likely already over $ 200,000 / $ 250,000 [surtax] Threshold, “he said.

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