75% of stock owners won’t pay Biden’s proposed capital-gains tax hike

President Joe Biden and First Lady Jill Biden are walking the Ellipse near the White House on April 25, 2021.

Tasos Katopodis | Getty Images News | Getty Images

Around 75% of US equity investors would not be subject to a capital gains tax rate increase due to the nature of the accounts they hold, according to UBS.

President Joe Biden is expected to propose raising the federal highest capital gains tax from its current 20% for millionaires to 39.6%.

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Retirement accounts

However, many people would be shielded from politics.

At this point, approximately 75% of investors will own US stocks in accounts that are not subject to capital gains tax. This emerges from a UBS research note published on Friday.

Unless you’re making $ 1 million a year, you don’t have to worry about that extra tax.

Paul Fremder

Director of Financial Planning at ProVise Management Group

This includes retirement accounts such as individual retirement accounts and company retirement plans such as 401 (k) plans. Foundations and foreign investors also do not pay any capital gains tax.

“When the average American owns stocks, equity funds, or exchange-traded funds in a qualifying field [retirement] Plan, it has no impact, “said Paul Auslander, certified financial planner and director of financial planning at ProVise Management Group, of Biden’s anticipated proposal.

Remaining 25%

The remaining 25% of investors hold stocks in taxable brokerage accounts that would be subject to capital gains tax.

However, a tax hike would not necessarily apply to all of these taxable accounts either.

Biden’s policies are expected to hit taxpayers whose incomes exceed $ 1 million each year.

According to the latest IRS data, around 540,000 taxpayers had higher incomes in 2018. They represent 0.3% of the 154 million people who filed a tax return for this year.

“If you don’t make $ 1 million a year, you don’t have to worry about that extra tax,” said Austener.

Biden is expected to release the proposal to fund spending on the upcoming American family plan, which is expected to be around $ 1 trillion.

The proposal can also change during the legislative negotiations in Congress. For example, UBS expects lawmakers to pass a long-term capital gains tax rate of 28% instead of 39.6%.

Investors who are not sure whether their investment account is subject to capital gains tax can see their account title, said Auslandser.

The title for a retirement account would clearly identify an investor’s name with associated language such as “401 (k)” or “IRA,” he said.

Tax still owed

Americans who invest in 401 (k) plans, IRAs, and other retirement plans will eventually have to pay taxes on the savings.

Savers in traditional pre-tax accounts owe income taxes when they withdraw the money. Those who keep money in a Roth account pay taxes up front. However, along the way, they do not pay taxes on the investment income.

“There is no tax on profits made on the account,” said Richard Winchester, associate professor at Seton Hall Law School.

Likewise, others such as foundations and foreign investors do not owe any capital gains taxes.

For example, foundations are typically held by tax-exempt organizations like universities, Winchester said.

Likewise, non-US residents who purchase US stocks owe taxes on their investment income. However, they do so under a tax mechanism and regime different from capital gains tax, Winchester added.

“It’s separate from the tax that Americans pay,” Winchester said.

The total tax depends on the treaties that various countries have concluded with the USA

Brokerage firms generally withhold the amount when foreign investors sell stocks and other assets. The company then pays the US government the amount.

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