President Biden Has A Plan
With chatter among lawmakers about taxing the wealthy and specifically calling out capital gains tax rates for high-net-worth individuals, some people are intentionally triggering capital gains taxes today and locking in today’s tax rates. For those who wish to defer and minimize capital gains taxes, strategies abound. With the basis step up at death afforded under current tax laws, perpetual deferral can result in the total elimination of capital gains taxes. Of course, that basis step up is also a target for elimination by the Biden administration. This next article is a brief overview of some techniques commonly used by corporate executives and others with appreciated, concentrated stock holdings. But first, President Biden has a plan.
Timely thoughts and commentary on taxes and finances
With midterms already top of mind, tax hikes are popular media talking points among Democrats. But despite being featured on the menu, the full course won’t make it out of the kitchen.
Depending on your particular circumstances, you might employ one or more of the strategies in this article to defer and minimize capital gains taxes. The strategies vary from those that generate liquidity to those that reduce liquidity and include several that result in a more diversified portfolio, hedge against declines in value, and retain full exposure to the stock.
While the article focuses on strategies for publicly traded stocks, some of the strategies can be used with other assets, such as art and collectibles.
President Biden has a plan
Throughout his campaign, President Biden was consistent – he planned to raise taxes for high-net-worth individuals and families and he drew the line at those earning more than $400,000 per year. But now those plans need to square with Biden’s plans to change the course of history and erase the presidential penalty [i] when it comes to the 2022 midterms. Aside from George W. Bush in the wake of 9/11, no modern president has delivered a successful midterm.
Some Democrats believe that Obama, who labeled his own first midterm a shellacking, tried too hard to gain bipartisan support for his policy priorities and should have instead pursued policies that could have been enacted more quickly to showcase results for the midterms. There are others who believe Biden cares more about highlighting issues than enacting legislation. Biden is likely to pursue populist policies – stimulus checks, mass vaccinations, and opening schools, small businesses, sports stadiums and concert venues – that he can safely push through Congress in the next 18 months. Biden will focus on jobs and the economy. When it comes to taxes, populist policies will continue to be paraded through congressional hearings and top media talking points before they are diluted and quietly dropped in committee conferences.
During Treasury Secretary Janet Yellen’s confirmation hearing, she said that priority one is pandemic relief, and somewhere thereafter come tax hikes for corporations and the wealthy. On the latter, she said Treasury would consider among other things a “mark-to-market” tax on unrealized capital gains, meaning that capital gains taxes would be levied every year on the net appreciation of one’s investment portfolio regardless of what positions were sold during the year. Incoming chair of the Senate Finance Committee Senator Ron Wyden, who is up for reelection in 2022 in a left-leaning state, has proposed similar legislation for high net worth individuals in the recent past.
The way in which Biden has started to negotiate the $1.9 trillion stimulus package he proposed – and for which he originally said there was no substitute – is an analogue for what we are likely to see on the tax front. To reduce the stimulus bill’s cost, Biden and left-leaning democrats are now open to lowering the income threshold for determining who is eligible to receive stimulus checks.
Following this playbook, instead of increasing the highest tax bracket to 39.6 percent for those earning more than $400,000 per year as Biden originally proposed, the final legislation might, for example, impact high-net-worth individuals and families earning more than $1 million and include limits on itemized deductions and reductions to the estate tax exemption. If enacted, a corporate tax hike will likely fall well short of the seven-percentage point increase originally proposed by Biden. These tax increases could be the peace offerings moderates like Joe Manchin III, Krysten Sinema, and Jon Tester offer to the progressive base.
Increases to capital gains rates or social security taxes are both unlikely. Changes to social security cannot be included in reconciliation bills and there are not ten Republican senators who will vote to increase social security taxes. Increases to capital gains tax rates are likely off limits because incoming chairman of the House Ways and Means Committee Representative Richard Neal of Massachusetts (Fidelity’s home-state) is up for reelection in 2022. He decides what issues see the light of day and those that don’t because the Constitution requires that tax legislation originate in the House.
[i] Journal of Politics, Vol. 50, No. 4 (Nov., 1988)
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