Spreading income over two tax years
Depending on your tax bracket, the tax rates on long term capital gains and qualified dividends ranges from 0% - 20%. The tax rates on ordinary income range from 0% - 37%. Biden’s proposal is to increase the top income tax rate back to 39.6% and filers with more than $1million of income will face a long-term capital gains rates of 39.6% (up from 20%).
You can deduct losses up to $3,000 with any excess loss carried forward. Should you wish to reinvest in the same stock, either it’s best to do so 30 days before or 30 days after the sale to avoid wash sale rules, which would disallow the loss.
What should you do?
By spreading capital gains/income between tax years, you can abstain from incurring spikes in income, which may push gains/income in to the higher tax brackets. This may help minimise the total tax paid for those tax years. You may also want to consider realising some capital losses to reduce tax on other investment income and gains. Do always consider the US and local tax impact of your tax and investment planning.
If you have an income over $1million, you may want to consider accelerating gains in 2020 if there’s a potential chance of tax rates almost doubling in the future. An investment decision should also be made, and there is the possibility of disposing of and reacquiring an asset, but we advise that you seek advice tailored to your circumstances.
Net Investment Income Tax (NIIT)
You may continue to incur an additional tax of 3.8% on unearned investment income, where your modified Adjusted Gross Income (AGI) exceeds the following thresholds:
What should you do?
By spreading investment income across a number of years or offsetting it by above the line deductions, you can prevent the requirement of paying the additional 3.8% NIIT by keeping your total income under the NIIT thresholds. To do this, you could consider paying a dividend or realising capital losses.