With the Democratic and Republican conventions now behind us, we are firmly in election season. Both Vice President Kamala Harris and former President Donald Trump's camps have outlined specific tax policies. Taxes can have a big impact on your long-term wealth. Today, we'll focus on those policies that could most directly impact your portfolio and long-term wealth.
For some, hundreds of thousands of dollars could be at stake.
TL;DR: We believe Kamala Harris' proposed capital gains tax changes and potential changes to inheritance taxes, or the step-up in cost basis, could affect the most people if passed.
Disclaimer: This is a tax policy discussion, not a political one.
What you need to know
First, let's get grounded with three important concepts that are part of policy conversations:
1. Step-up in inheritance cost basis
Under current rules, let's say you inherit $100,000 of Apple stock that was originally purchased for $50,000. Your cost basis would reset from $50,000 to $100,000 at the time of inheritance. You would pay taxes on future profits relative to the $100,000 cost basis.
New policy could change the rules.
2. Capital gains tax
Under current rules, capital gains tax is levied on any profit made when selling an investment. Profit is the difference between the current market price and the purchase price, or cost basis.
In other words, you pay tax on the gain you realize when you sell an investment. If you hold the investment over a year, you pay long-term capital gains tax. If under a year, you pay short-term capital gains tax, which is the same tax rate you pay on your salary and is also referred to as the ordinary income tax rate.
New policy could require some to pay the ordinary income tax rate instead of the lower capital gains tax rate.
3. Unrealized gains
While capital gains tax is paid on profit, historically there haven’t been taxes assessed on unrealized gains. These are gains on stocks (or other assets) you haven’t sold and thus haven't realized as profit.
New policy could tax these.
In focus: potential changes
Inheritance: Step-up in cost basis
Harris proposal: A $1M exemption for step-up in basis, with gains above this amount subject to tax.
Trump proposal: Preserve the step-up in basis at death.
Example:
Let's say you inherit stock worth $3 million, originally purchased for $500,000.
Under Harris's proposal:
- $1 million would be exempt.
- You'd pay tax on $2M less than $500k original purchase price, or $1.5M.
Under current law and Trump's proposal:
- The basis would be stepped up to $3 million.
- If you immediately sold, you'd owe no capital gains tax.
Capital gains tax
Harris proposal:
Whether single or married filing jointly, if you earn over $1M from salary, bonus, dividends, or capital gains in a given year, then you’ll face the ordinary income tax rate on capital gains.
On a related note, Harris (and Biden) also proposed to raise the marginal tax rate for those earning over $400,000 to 39.6% from 37% today.
Note, this does not include the impact of state capital gains tax. In some states, the highest tax bracket could pay over 50% in total taxes including current state rates plus federal rates under Kamala Harris's capital gains tax plan.
Trump proposal:
Based on Trump’s announced policy views, the capital gains tax rate structure would remain the same. He could also push for lower capital gains rates.
Let's compare the proposals with an example.
Imagine you're earning $900K annually, and you sell stock for a $200,000 long-term capital gain. Your total earnings for the year are $1.1M.
Under current law:
- Your capital gains would be taxed at 20% (plus the 3.8% net investment income tax on high earners).
- Tax Due: $47,600
Under Harris's proposal:
- Your capital gains would be taxed as ordinary income at 39.6% (plus the 3.8% NIIT).
- Tax Due: $86,800
Under Trump's proposal:
- No change from current law, or potentially lower rates.
- Tax Due: $47,600 or less
Unrealized gains
This only applies to about 10,000 people in the whole country, but we thought you'd find it interesting.
Harris Proposal: Does Kamala Harris want to tax unrealized capital gains for everyone? No, this proposal is specifically targeted at individuals with a net worth of $100M and over.
Trump Proposal: No tax on unrealized gains.
Example: Imagine you have an investment portfolio worth $150 million, with $50 million in unrealized gains.
Under Harris's Proposal:
Tax on the $50 million in unrealized gains.
Under Trump's Proposal:
No tax would be due on unrealized gains.
What should you do?
At this point, there is a lot of uncertainty around tax policy. We've simplified these potential changes for you, but each would likely come with a lot of nuance.
We also don't know what policy will ultimately be submitted for Congressional approval, and if Congress would pass such policy. For instance, Biden's proposals from March have yet to be approved and both of these candidates could adjust their stance ahead of the election.
That being said, it's important to plan ahead, especially considering the potential impact of Kamala Harris's capital gains tax proposals. Here are some things to consider:
Cost basis step-up and estate planning:
If you plan to pass on assets to a child or are set to receive assets from a parent, you could benefit from estate planning strategies. These could include more gifting and/or use of trusts.
Capital gains tax:
If you have a lot of unrealized gains and you intend to sell your stocks for a large purchase that would put you over the $1M threshold, it might be worth doing some planning.
Consider ways to spread capital gains over multiple years or use tax-loss harvesting to reduce your taxable earnings. You can also use loss carry forwards to help offset your gains.
Tax-advantaged accounts:
Leverage tax-advantaged accounts like 401(k)s and IRAs to reduce your taxable earnings.
How Can Mezzi Help?
Mezzi helps you stay ahead of policy changes, including potential implementations of Kamala Harris's capital gains tax plan. Here are a few ways:
Estimate your taxes
Personalize Mezzi with your current or future tax rate.
Track loss carry forwards
Track loss carry forwards and use them to reduce your tax burden.
Track unrealized gains
Track unrealized gains across taxable accounts so you have a clear sense of how much tax you could expect to pay if you sold positions.
Tax-loss harvest
Sell positions with losses to offset your realized gains and maximize deductions against your income.
Taxable vs. tax-advantaged accounts
Easily track allocations, returns, diversification, and more for both taxable and tax-advantaged accounts with Mezzi.
