Worried About Higher Taxes?

March 20212020-21 Taxes wooden blocks

Worried About Higher Taxes?

By Brian Cayon, Vice President - Chief Investment Officer

2021 ushered in a new presidential administration and with it, some concern about the possibility for higher taxes. President Biden’s $1.9 trillion pandemic relief bill will cut taxes for lower and middle-income Americans, and he is expected to call for higher taxes on corporations and the rich.

It remains to be seen how many of his expected proposals become law, but it doesn’t hurt to start planning ahead if you’re concerned about a higher tax bill. One of the biggest concerns is what happens to the capital gains tax rate, currently at 20%. Many planners are expecting an increase, perhaps to the same level as income tax rates. That’s not much of a jump for many earners, but could be significant for someone in the highest tax bracket (37%).

The good news is that capital gains taxes are one of the few taxes that you can control, since it’s up to you when you sell the securities. There are also steps that you can take to not only help with capital gains taxes, but also improve the tax-efficiency of your total portfolio. Some of these strategies include:

  • Asset Location – a strategy that involves distributing your investment assets across different savings vehicles including taxable accounts, tax-exempt accounts, tax-deferred accounts, trust accounts, etc.
  • Tax-loss Harvesting – when selling a security at a loss, it can be used to offset a gain realized by selling an appreciated security.
  • Pick Your Cost Basis – if you’ve purchased an investment at different times and at different prices, you may be able to select some of the higher priced shares as your “cost basis,” thus reducing your potential tax liability.

An investment strategy should not be driven solely by taxes. However, it is important to have a plan in place that addresses them – especially if most of your assets are held in taxable accounts. If you’d like to know how a tax-smart investment strategy might benefit you, contact the Wealth Management group at Waukesha State Bank at (262) 522-7400 or email WealthManagement@waukeshabank.com.

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