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Capital Gains Tax on the Rise: What Business Owners and Real Estate Investors Need to Know in 2024

Are you a business owner or a baby boomer approaching retirement and considering selling your business or a significant real estate holding? If so, understanding the potential changes to capital gains tax is critical for making informed financial decisions.

President Biden’s proposed budget for Fiscal Year 2025 includes significant tax reforms aimed at high-income earners, which could have a major impact on your financial planning. While these proposals are still in the early stages and not yet law, being proactive can help you navigate potential changes effectively.

Capital Gains Tax on the Rise?

Currently, the capital gains tax rate for long-term capital gains (assets held for more than one year) sits at a maximum of 20%. However, President Biden’s proposal seeks to nearly double this rate to 39.6% for individuals with an annual income exceeding $1 million. This significant increase reflects a broader effort to ensure wealthier taxpayers contribute a larger share to federal revenue.

The proposal goes a step further, suggesting a potential capital gains tax rate of 44.6% for those with high net investment income and taxable income exceeding a certain threshold. This combined rate would include an increase in the net investment income tax on top of the proposed top ordinary income tax rate.

What This Means for Business Owners and Real Estate Investors

If you’re planning to sell a business or a major real estate asset, these proposed changes could significantly impact your tax bill. Here are some key considerations:

  • Timing is Crucial: If the proposed tax increases become law, selling your assets before the changes take effect could result in substantial tax savings. However, this necessitates careful planning and consideration of current market conditions.
  • Estate Planning Adjustments: The proposal also includes changes to the “stepped-up basis” rule. Currently, this rule allows heirs to inherit assets at their fair market value at the time of the decedent’s death, minimizing capital gains taxes. Under the new proposal, gains exceeding a set amount per person (or couple) would be taxed if the property isn’t donated to charity. This necessitates reviewing your estate planning strategies, especially if you intend to leave behind significant assets.
  • Closing the Carried Interest Loophole: The Biden administration aims to eliminate the “carried interest loophole” which allows some investment managers to classify a portion of their compensation as capital gains (taxed at a lower rate) instead of ordinary income. This change would result in higher taxes for those in the investment management industry.
  • Increased Medicare Surtax: Another key aspect of the proposal involves raising the Medicare surtax rate from 3.8% to 5% for high-income earners. This increase would apply to wages, salaries, and capital gains, further impacting those in high-income brackets.

Proactive Planning Strategies

Given the potential for these changes, here are some planning approaches to consider:

  • Consult with a Tax Advisor: Connect with a qualified tax professional to understand how these proposed changes might impact your specific situation. They can help you develop personalized strategies to minimize your tax liabilities.
  • Evaluate Asset Sale Timing: Carefully assess the timing of your asset sales. If you’re considering selling a business or real estate, doing so before any tax changes take effect could be financially advantageous.
  • Review Estate Plans: Revisit your estate planning documents and strategies. Consider the implications of the proposed changes to the stepped-up basis rule and explore options like charitable donations to potentially reduce tax burdens.
  • Stay Informed: Keep yourself updated on legislative developments. The political landscape can shift quickly, and staying informed will help you make timely and well-informed decisions.

The Road Ahead

While President Biden’s proposed tax changes haven’t been enacted yet, they signal a potential shift in the tax landscape that could significantly impact business owners and real estate investors. Proactive planning through consultations with a qualified tax advisor and staying informed about legislative updates can empower you to navigate uncertainties and position yourself for financial success. Remember, consulting with a tax advisor allows you to tailor these strategies to your unique circumstances.

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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