As we are nearing the election in November, we are starting to receive more details on some of the policies that likely Democratic presidential nominee Joe Biden is proposing.  His stances on taxes have begun to take center stage over the past couple of weeks.  Here are some of the details that Joe Biden is proposing.

Individual Tax Rates:

For those making $400,000 or more the top tax rate will be increased from 37% to 39.6%.

President Trump is looking to lower taxes on the middle class by 10%. This could effect those in the 22% or 24% brackets.

Capital Gains:

Increase top long-term capital gain and qualified dividend tax rate to 43.4% (ordinary income tax rate plus healthcare surtax) for income above $1 million. Today the top capital gains tax rate is 20% with a 3.8% net investment income tax.

The net investment income tax remains the same.

Deductions

Biden is looking to limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%, which means taxpayers in tax brackets higher than 28% will face limited itemized deductions.

President Trump is looking to keep the standard deduction amounts the same at $12,400 per individual and $28,800 for married filing jointly.  

Biden is also looking to phase out the 20 percent pass-through deduction for income over $400,000.

Corporate Tax

Presidential candidate Joe Biden is looking to raise the corporate tax rate from 21% up to 28%.  Keep in mind that most corporations pay double taxation due to being taxed at the corporate level and then again at their personal level.  

Biden is also looking at establishing a 15% minimum corporate tax rate for companies reporting a net income over $100 million. Currently, no minimum tax is imposed on companies.

Estate Taxes

Biden is also looking to remove the stepped up basis provision for stock that is inherited by beneficiaries. This means that instead of removing the capital gains the owner of the stock would either have to pay the capital gains or that burden will then be passed the the beneficiaries.

The second shift would be to the exemption amounts on estates. Biden is proposing moving the exemption amount down to $3.5Million and bump the estate tax rate up to 55%.  This would be an increase from the exemption amount of $11,580,000.

There are several other changes that Biden is proposing that he has provided less detail on. He has also suggested raising taxes on wealthy especially around investment income. He also mentioned the possibility of getting rid of the 1031 Exchange for capital gains in real estate.

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What is it?

Tax loss harvesting is the strategy of selling investments that are at a loss in order to offset short term or long term capital gains for that year.  However, if the investor does not have realized capital gains for that year the investment loss can be used to offset $3,000 worth of ordinary income for the year.  One thing to keep in mind is that if the investment loss was more than $3,000 the excess amount may be carried forward to future years to offset either ordinary income or capital gains.  This amount only applies to taxable accounts. The gains and losses in retirement accounts are tax deferred and do not apply to this same tax treatment.

Wash Sale Rule

In order to prevent investors from gaming the system the IRS put in the wash sale rule. This rule was created in order to prevent investors from taking a tax deduction and then turning around and repurchasing the same or a “substantially identical” security.  The wash sale rule consists of 61 total days. This is broken down by 30 days before the purchase and 30 days after the sale that an investor cannot purchase a substantially identical security.

When to consider tax loss harvesting

Most investors will take a look at selling some securities at a loss towards the end of the year while they are doing some year end tax planning. However, this strategy can be implied all throughout the year.  A time to consider tax loss harvesting would be during the normal course of rebalancing your investments. This is good because you can capture some tax savings and then invest in a security that may be in a similar asset category to maintain your same overall asset allocation.

Another consideration is if an investor has held stock in a single company over the course of many years.  More often then not the investor may be reinvesting the dividends from this company stock. The first step would be to identify shares that were purchased through reinvestment that may currently be trading at a loss and look to sell those shares. This can help to offset taxes on the qualified dividends or the future sale of the stock to produce income in retirement.

Identifying certain positions in your portfolio now can be a good time to harvest losses if you believe the market may rebound in the future to higher levels.  The strategy could be to sell certain investments to lock in the tax deduction, and look to purchase other securities that are not substantially identical with the expectation of those investments appreciating in the future.  Now is a great time to examine what future income you may need from your investment portfolio and if you see securities that are at a loss right now, it could be a good time to sell those in order to offset future capital gains later this year.

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