We warned our clients and readers this was coming. Now it appears imminent. Multiple news sources reported that President Biden is poised to propose legislation on Wednesday, April 28 to substantially increase capital gains tax rates.
What We Know Right Now
The Biden administration is expected to announce its American Families Plan before the President’s address to a joint session of Congress on Wednesday, April 28.
As reported in the New York Times, the Plan “will include about $1.5 trillion in new spending and tax credits meant to fight poverty, reduce child care costs for families, make prekindergarten and community college free to all, and establish a national paid leave program.”
It is expected to be paid for at least in part with tax increases on high-income Americans and wealthy investors and heirs.
In addition to the increase in capital gains rates, other tax increases are rumored to include an increase in the highest personal income tax rate from 37% to 39.6%, expanding payroll taxes for those with incomes above $400,000, and changes to estate tax laws to increase the top rate from 40% to 45% and lower the estate tax exemption from its current $11.7 million per person to $3.5 million per person.
The President will reportedly propose an increase in capital gains rates for those earning over $1 million to ordinary income rates. This proposal, if enacted, will raise the capital gains rates for these investors from 20% to 39.6%. Capital gains would also still be subject to the 3.8% surtax that helps fund the Affordable Care Act, raising the capital gains rate to 43.4% from 23.8% currently.
This is a very fluid situation and we will provide you with more facts as we learn them. We do not know the definition of those making over $1 million which would trigger the much higher ordinary income rate on capital gains and specifically whether this definition includes the capital gains from the sale of a business. We do not know the effective date of this legislation. And we do not know if the President has the full support of his own party for these proposals or whether they are likely to be modified.
What It Means For Insurance M&A
The bottom line is if these proposals are enacted into law and you sell your business after this tax increase becomes effective, you will pay substantially more in taxes and retain far less of the transaction proceeds.
If you have any interest in engaging in a strategic transaction over the next few years, time is of the essence. We would advise you not to wait as it typically takes at least 6 months to complete a strategic transaction. And the end of this year is certainly going to be remarkably busy.
We are here if you would like to have a discussion about your strategic options – please email or call us:
Mike Fletcher | email@example.com | 516-967-1958
Matt Beizer | firstname.lastname@example.org | 917-836-0373