Q: How does the Democrats’ newly proposed tax bill affect the capital gains tax rate?
A: Dear Tax Saver:
The new bill would increase the long-term capital gains tax rate from 20% to 25% on individuals with taxable income over $400,000. The increase is set to be effective for the tax year ending after September 13, 2021. However, the bill includes a transition rule that provides that any transactions completed on or before September 13th—or subject to a binding written contract entered into on or before September 13th—are subject to the 20% tax rate.
Any capital gains recognized after September 13th would be subject to the 25% rate. So, for example, if you entered into a contract to sell your business in May 2021, and the sale closes in November 2021, your transaction would be subject to the 20% rate. However, if you enter into a contract after September 13, your rate will be 25%.
While it may seem too late to do anything about your capital gains, it’s not—but it requires planning. If you are selling assets this year that will result in significant capital gains tax, contact your Family Business Lawyer™ immediately.