Planning for higher capital gains taxes

For many of you, the biggest consequences of the latest tax policies could be related to capital gains. The current highest capital gains rate possible, is 37.1%. Let’s take a quick look at the standard current rates, minus any state tax:

The more capital a person has, the more necessary proper planning becomes. While we still don’t know a precise date — or even have 100% certainty that capital gains hikes will be enacted — it’s looking very probable something will happen and happen soon. High earners may be looking at nearly 44% capital gains rates in the near future.

Here are five strategies to mitigate the expected capital gains tax rate increase:

1. Sell before effective date

The simplest strategy can be to accelerate the sale of the capital asset to trigger and lock in the lower tax rate. But when is the deadline to do this before the new higher rate kicks in? While it’s possible we’ll have short notice on the date of the enactment, it’s likely best to wait until the date is certain and the rate is known before making any big decisions. If rates go up, then there will likely be a frenzy at the end of the year to get assets sold before 2022.  There is also talk of a retroactive date of April 28, 2021

2. Invest through tax-favored instruments

Investing in tax-free instruments such as private placement life insurance can be a great way to avoid tax. Structured properly, PPLI gives tax-free accumulation and tax-free access to appreciation via loans. There’s also an income tax-free death benefit and potentially estate tax-free death benefit.

3. Put more money in your retirement plan

This will allow your investments to increase and stocks to be bought and sold without being subject to capital gains tax now.

4. Offset gains in years when you can show losses

Plan to sell your losing stocks or equities in years when you intend to take profits from equities that have done well.

5. Invest in real estate

Buy real estate for rental purposes.  This is a good way to build your assets for retirement.  Consider if you can live in the property 2 of 5 years to avoid capital gains tax.