President Joe Biden hasn’t hidden his desire to raise taxes on corporations and the wealthy to fund a $2.3 trillion infrastructure package and new social safety net programs.
The administration has consistently floated lifting the corporate tax rate to 28% from its current rate, a Trump-era low of 21%. More recently, Biden said he is targeting an increase in the capital gains tax on the wealthiest Americans to 43.4%, including a surtax. The existing capital gains tax stands at a top rate of 23.8%.
“Well, I think that an honest look at corporate America will tell you that they can do more to pay their fair share. Look, remember we are calling for a tax rate of 28%. For most of my lifetime that rate stood at 35% and American companies were perfectly competitive, extremely competitive. So if we can handle 35%, I am pretty sure we could handle 28%,” Transportation Secretary Pete Buttigieg recently said on Yahoo Finance Presents.
Point well taken.
While history says the stock market does well during periods of higher taxes (as higher taxes often come with stronger economic growth), that doesn’t mean you should sit idly by and not do anything with your money amidst increased taxation. In reality, higher taxes will require an investor to be more diligent in portfolio diversification and other nuances of building wealth.
Here are eight ways strategists at investment bank UBS say you can prepare for higher taxes.
1. Increase tax efficiencies
UBS Chief Investment Officer of the Americas Solita Marcelli says it’s important for investors to consider the tax properties of investment vehicles. That may mean putting more money to work in ETFs rather than mutual funds.
“Tilting asset allocations toward exchange traded funds (ETFs) and tax-managed separately managed accounts over mutual funds could make sense depending on your situation. Mutual funds tend to generate capital gains in bull markets that are distributed periodically to shareholders; by contrast, ETFs generally have fewer capital gains to distribute to shareholders, giving you more control over when capital gains are realized,” Marcelli explains.
2. Donate stocks to charity
Be a stock donor in an effort to minimize taxes, suggests Marcelli.
“Donate securities that have appreciated in value to charities or to a donor advised fund, rather than realizing capital gains tax and using cash. Nonprofit organizations are shielded from taxation, so they can benefit from capital gains on prior investments without incurring a liability at year-end,” notes the strategist.
3. Give to others
Sharing is caring and potentially helpful to minimizing taxes.
Says Marcelli, “Donor advised funds, private foundations, and some trusts can offer the potential to make gifts out of your taxable estate today and grow those assets for years or decades before ultimately disbursing your gift—and any gains—to charities and other nonprofit organizations.”
4. Increase tax-free income
There is more to investing than buying equities. That’s a key factor to consider when trying to keep tax payments at bay.
“Allocating assets to tax exempt municipal securities over corporate bonds can help to reduce your ordinary taxable income. We do not expect substantive changes in the treatment of interest on state and local government bonds. Thus far, the president has not unveiled a proposal to limit the benefits of tax exemption to lower tax brackets, which was a recurring feature of President Obama’s own budget proposals,” Marcelli says.
5. Harvest tax losses and defer capital gains
It makes sense to harvest losses more than one time a year to minimize taxes, Marcelli suggests.
“Tax loss harvesting can help you to defer capital gains taxes further into the future, and the growth of deferred taxes will often eventually make up for higher future tax rates, allowing your portfolio to create more aftertax wealth than if you needed to pay taxes today. While many investors focus on tax loss harvesting in the fourth quarter, this can result in missed opportunities because the market tends to recover from dips quickly. We recommend harvesting capital losses throughout the year, whenever losses are available, in order to maximize your tax deferral potential,” Marcelli says.
6. Focus on tax diversification
Hit up your financial advisor and find some tax-differed investment opportunities.
Points out Marcelli, “You can manage your tax burden today, and in the future, by investing more of your wealth into tax-deferred accounts (e.g. Traditional IRAs/401ks/403bs) and tax-exempt accounts (e.g. Roth IRAs/401ks/403bs, Health Savings Accounts, and 529 college savings).”
7. Pick the right location for assets
Make sure your investments are in the right accounts. Yes, you have to pay attention to that as well.
“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. Generally speaking, high income and high-turnover investments generate more tax drag than growth-oriented investments, and can contribute more to your wealth when they are held in tax-advantaged accounts,” Marcelli says.
8. Accelerate lifetime gifts
No time like the present to properly manage one’s inheritance.
Stresses Marcelli, “We are in a historically attractive window of opportunity for managing estate and inheritance taxes, and although President Biden hasn’t proposed a lower lifetime gift and estate tax exemption at this time, that window is scheduled to close in 2025 even if Congress doesn’t act sooner. It can take weeks or even months to implement a thoughtful estate plan, and the cost of procrastination could be steep, so we don’t recommend waiting until a proposal is finalized.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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