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Avoid Hasty Actions As Capital Gains Tax Hikes Loom - Wells Fargo

Tom Burroughes

26 May 2021

High net worth individuals facing the prospect of a sharp hike to capital gains taxes in the US shouldn’t panic and overturn their investments, an advisor warns. 

The Biden administration has proposed doubling the CGT rate to about 40 per cent and, when some states’ own taxes are factored in, such as in California and New York, the bite could go north of 50 per cent. That applies to taxpayers who earn more than $1 million at the personal income tax rate, which Biden also wants to raise to 39.6 per cent from 37 per cent.

The first clear advice to clients is not to act in haste or panic – there is no clear idea of exactly how and when income tax changes will work out, Harry Drozdowski, who is a director of Legacy and Wealth Planning for the Western region at the private banking arm of Wells Fargo, said.

There is a risk that some of the tax changes being mooted could be retroactive to the start of this year, he said.

With the possibility of a doubling in the CGT rate to 39.6 per cent , they may be tempted to realize capital gains now rather than wait until next year, he said. “If you accelerate the recognition of capital gains to this year, there is a risk that new legislation could make those gains taxable at an increased rate.

There are cases of people who have “over-planned” - for example, people who have given away too much to relatives such as children - ending up with insufficient amounts to live on, Drozdowski continued. 

“Don’t do things solely for potential tax changes – any wealth planning should take into account a client’s total picture,” he said. 

“Clients are very interested in things that grant flexibility,” he said, citing the case of SLATs . 

The Biden proposals come at a time when the impact of COVID-19 on wealth inequality, when added to the massive central bank money printing, has become a hot-button political issue. Even before the pandemic struck in the US more than a year ago, inequality was a controversial issue on both sides of the political divide. 

State taxes
As mentioned already, it is not just federal tax changes that have concerned clients; states’ taxes can be just as significant and there is a wide range of rates, with coastal states such as California levying far higher rates than, say, Nevada or Texas.

“We have a lot of clients interested in moving from high-tax jurisdictions,” Drozdowski said. 

Recent US Census data shows that California and New York are losing populations; as a result this is even affecting allocations of districts in the US House of Representatives.

This concern should not be exaggerated – even though Californian taxes are relatively high, its tax revenues were robust in 2020 and it remains home to many of the world’s richest people. 

Family Wealth Report asked Drozdowski if he was getting queries from clients trying to renounce US citizenship and leaving the clutches of the IRS. (This news service recently spoke to an advisor who has predicted a “dramatic” rise in such cases. 

Renunciation of US citizenship is a “conversation that keeps coming up,” Drozdowski said, although in practice the numbers of people taking the route are low.