What The Taxman Can’t Touch

Friday, May 07, 2021

My article about the proposed increase in estate taxes touched a lot of people’s hot button, and not in a good way.

Unfortunately, that’s just the tip of the tax-increase iceberg. Somebody has to pay for all those trillion-dollar spending programs, and the people in power have zeroed in on investors to foot a huge chunk of the cost.

President Joe Biden wants to raise our capital gain taxes — and not by a little, but by a lot.

Source: FX Street

Biden wants to raise the top federal tax rate on long-term capital gains from 23.8% today to as high as 39.6% for some.

The capital gains tax for anyone who earns more than $1 million will rise to 39.6%. On top of that, earners in that bracket will also have to pay the 3.8% Obamacare tax, which brings you to 43.4%.

That’s just federal rate. California and New York, for example, have top state capital gains tax rates of 13.3% and 11.85%, respectively. That brings the total capital gains tax rate well over 50%, depending on where you live. Ouch.

Thirteen states and the District of Colombia would have top combined capital gains tax rates at or above 50%:

•  56.7% CA

•  54.3% NY (58.2% New York City)

•  54.2% NJ

•  53.3% OR (57.3% Portland)

•  53.3% MN

•  52.4% DC

•  52.2% VT

•  50.7% HI

•  50.6% ME

•  50.4% CT

•  50.3% ID

•  50.2% NE

•  50.2% MT

•  50.0% DE

Remember, long-term capital gains are currently taxed at a top rate of 23.8%, so we’re talking about a huge tax increase even if you’ve owned the asset for more than a year.

Short-term capital gains, or those held a year or less, are already taxed as ordinary income under current law.

Does this mean you should grab gains now before capital gains tax rates go up?


First, this is just a proposal, not the law of the land. I think it’s a mistake to take action before we know exactly what the new rules will be.

Second, if you plan to hold an asset for a long, long time, don’t worry about what Washington D.C. may or may not do. Example: I’ve owned Alphabet Inc. (Nasdaq: GOOGL) for many years, and I plan to own it for many more.

I do, however, think it’s a good idea to carefully consider in what type of account you hold your equities and exchange-traded funds (ETF).

In my case, I concentrate the vast majority of my active trading dollars into two types of retirement accounts:

•  A self-directed Solo 401(k); and

•  A tax-deferred variable annuity.

There is no income tax on dividends, interest, short-term capital gains or long-term capital gains paid or accrued with respect to equities and ETFs held inside your retirement account. You can trade to your heart’s content without paying a single penny of taxes as long as those dollars remain inside your retirement account.

What I do every year is maximum-fund my Solo 401(k) account ($57,000 plus a $6,500 catch-up provision if you’re over 50 years old), and I put any additional money I want to save into my Nationwide Monument Advisor Variable Annuity.

There are no limits to how much money you can put into a tax-deferred annuity, though you don’t get a tax deduction for any money you put into it.

The advantage is that there’s no taxation whatsoever on the interest, dividends and capital gains as long as those dollars remain in the annuity. Once you withdraw the money out of an annuity, it’s taxed as ordinary income, as is the case with 401(k) plans and individual retirement accounts (IRAs).

Politicians in favor of the higher capital gains tax are saying they’ve identified a “loophole” that must be closed. That’s fine, if also a little silly.

And it’s OK. No matter how high they raise the capital gains tax rate, it won’t have a meaningful impact on me because most of my capital gains occur inside my retirement accounts.

You might consider doing the same if Washington D.C. tries to stick their hands deeper into your wallet.


Tony Sagami

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