- Tax hikes to offset infrastructure spending are likely on the horizon for the wealthiest Americans.
- President Biden has proposed an income tax increase and an increase in the capital gains rate.
- In a Monday note, UBS Global Wealth Management outlined eight steps investors can take.
- See more stories on Insider’s business page.
Tax hikes are probably on the horizon as President Joe Biden’s infrastructure package begins its slow march to becoming law.
Of course, not every provision may end up in the final package. But it is pretty likely, according to Morgan Stanley researchers, that tax filers making over $400,000 will see an increase in their income tax rate, and that the capital gains rate — which taxes assets like stocks — will go up from its currently favorably low rate.
The top 1% of Americans would take on essentially all of the tax burden in Biden’s recent proposal, seeing taxes increase by about $100,00 a year.
The New York Times’ David Leonhardt reports that Biden’s tax proposals are still fairly moderate in a historical context, coming in far below the heights of the 1940s through 1960s. Even so, wealthy Americans are seeking guidance. Insider’s Hayley Cuccinello reported that those advising the wealthy have received a flurry of calls from clients worried about their taxes and estate planning.
UBS, the largest wealth manager in the world, has some thoughts on what panicked investors could do to prepare for these potential changes. In a Monday note, Solita Marcelli, UBS Global Wealth Management’s chief investment officer for the Americas, wrote of eight steps that worried investors can take.
Marcelli noted that a bill is still a ways off, with proposed tax measures likely be scaled back in the final product.
(1) Upping tax efficiency
Marcelli recommends eyeing the different tax situations for potential investments — and to weigh if switching over could incur capital gains that might offset potential tax benefits.
“Separately managed accounts can be especially tax-efficient because they can utilize a tax-management overlay that realizes capital losses and defers capital gains on your investment down to the individual security and tax lot level,” Marcelli writes.
(2) Donate your stocks to charity instead of cash
That way investors won’t be hit with a capital-gains tax on the stock, which would happen if they chose to cash them out and proceed with a straightforward donation. Exempt nonprofits can benefit from their new donations, and “can benefit from capital gains on prior investments without incurring a liability at year-end.”
(3) Donate assets that can still grow
Give away part of your estate to funds that will still let those assets grow. Some foundations and other types of funds will hold onto the asset and then disburse both it and the value it accrues; Marcelli said that, for investors, that can defer or even cut down on tax payments, and yield greater after-tax value down the road.
(4) Move more money into untaxed income
“Allocating assets to tax exempt municipal securities over corporate bonds can help to reduce your ordinary taxable income,” Marcelli writes. UBS is not anticipating any major changes to how interest on state and local government bonds is treated.
(5) Sell off assets at a loss through ‘tax-loss harvesting’
“Tax-loss harvesting” is when you essentially sell off an asset that has lost value — so it hasn’t seen capital gains — and that loss is put towards your total portfolio, lowering how much you’ll end up getting taxed on. Instead of waiting until the end of the year to sell off securities at a loss, Marcelli recommends doing it throughout the year.
(6) Diversify your accounts
Marcelli recommends spreading more money into tax-exempt or tax-deferred accounts. That could mean putting more into your 401(k), college savings account, or even your Health Savings Account. In an HSA — which you can use for any expense after you’re over 65 — interest and contributions are untaxed.
(7) Put investments into the right accounts to maximize after-tax growth
“By allocating to the right investments (stocks, bonds, etc.) in the right accounts (taxable, tax-deferred, tax-exempt), you have an opportunity to increase the after-tax growth potential of your investments,” Marcelli writes. Marcelli also notes that high-income investments add more to wealth when they’re in “tax-advantaged accounts.”
(8) Ramp up lifetime gifts now, instead of when tax proposals are finalized
Marcelli says that we are in a “historically attractive window of opportunity for managing estate and inheritance taxes.” While Biden has not proposed any outright changes to estate and inheritance taxes, current rates are set to sunset in 2025 (if not sooner) — meaning it’s not a good idea to procrastinate.