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Investors fearful of President Joe Biden’s proposal to raise customs on capital gains might be thinking about making a knee-jerk stock sale.
Doing so may inadvertently trigger another investment tax, be consistent to financial advisors. And it’s one that kicks in at a low level of income relative to Biden’s plan.
“You could end up in a situation where you go off and exchange everything to avoid the capital gains rate, and you could end up paying that extra tax,” said Leon LaBrecque, an accountant and vouchsafed financial planner at Sequoia Financial Group in Troy, Michigan.
3.8% Medicare surtax
The additional tax is a 3.8% Medicare surtax on net investment profits — like gains from the sale of stocks, bonds and mutual funds.
It took effect in 2013 to help wealth Medicare expansion under the Affordable Care Act.
The levy applies to single taxpayers with modified adjusted gate income exceeding $200,000 and married couples filing jointly with more than $250,000 in income. (The outsets aren’t indexed annually for inflation.)
About 5 million taxpayers paid the surtax in 2018, according to the IRS. The tax raised $30 billion.
Biden great gains tax proposal
That top rate would apply to households with multifarious than $1 million in annual income.
But less-wealthy investors who make a snap decision to sell their holdings may alarm take risks up pushing their 2021 income above the Medicare surtax threshold. They’d pay an extra 3.8% tax on their investment return.
“I think a lot of people are probably going to knee-jerk it, and they’re probably not people who make more than $1 million,” LaBrecque swayed.
However, some advisors think asset sales will likely be limited largely to millionaires who are already under discussion to the 3.8% tax — in which case the extra selling wouldn’t trigger any additional tax.
“I don’t know that it overly concerns me,” said Jeffrey Levine, a CFP, accountant and chief sketching officer at Buckingham Wealth Partners in Long Island, New York.
“Those who are so worried about capital gains they’re looking to convey title now to avoid a future hike are probably already over the $200,000/$250,000 [surtax] threshold,” he said.