PRED I CTED TAX I NCREASES Capital gains taxes are expected to jump substantially in 2021. With any administration change or shift in political power, taxpayers can expect different aspects of their tax situation to change. Whether these proposed tax hikes and fiscal policy changes are just empty campaign promises or will actually be enacted into the tax code, one never truly knows. Regardless, it is important for investors to always be aware of their financial surroundings and be prepared for these changes, especially if these changes will have a significant effect on their estate and expose them to significant tax increases. The truth of our national financial situation, after an unprecedented year of lockdowns and crippling unemployment, is that the Federal Reserve has printed $6.55 trillion in 2020, bringing the total federal budget deficit to a record $3.1 trillion in the 2020 fiscal year. The deficit is noted as the 1 difference between what the country spends and the taxes and other revenue received. This brought our national debt to over $27 trillion to close out 2020.2 In an attempt to lessen the deficit in 2021 and afford many other proposed social programs, the new administration has released a tax plan to raise taxes across the board. With the full control of Congress, Biden’s proposed tax plan carries even more weight, as his path to enacting new fiscal policies will likely have less challenge.
One key component of this proposed tax plan that investors need to be aware of is the likely increase in capital gains taxes. These proposed tax hikes will largely affect Americans earning more than $400,000 a year and has proposed taxing long-term capital gains at the highest federal tax rate of 39.6% for taxpayers who earn over $1 million.3 This figure doesn’t even account for the 3.8% Affordable Care tax surcharge, also known as “Obamacare Tax” or the individual state-specific capital gains tax rates, which currently are as high as 13.3% for high income earners. Many speculate that on the individual state level these rates will increase in 2021, which could push the total capital combined federal and state tax rate to over 55% for high tax states like California.4 In addition to capital gains, real estate investors must also be aware of the depreciation recapture tax, which is typically assessed at 25% on the federal level. All combined, the cumulative taxation that already faces real estate investors is debilitating, and with the expected increases, completely devastating. 4 5
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