If you have stock options in your investment portfolio, aside from shares of a company, and restricted stock units, it is time that you start analyzing whether President Biden’s proposed tax changes will affect the way you plan your finances, indirectly or directly.
If there is going to be a hike in the capital gains tax, it is time that you think of an alternative or takes adequate measures before the new legislation kicks in. American Jobs Plan and American Families are the two areas that you can follow for the proposed tax provisions.
Willian D. King shares his views about what the impact of the proposed tax provisions might be below.
Let us find out the impact on stock compensationand the company shares. If you are a financial planner helping or guiding clients with their financial planning and investment, this is the time you must enlighten them about how to go about the same, keeping in mind the new changes.
Capital Gains Tax Rate
Long-term capital gains as the ones from the sales of company stock presently have a top tax rate of 20% in addition to a Medicare surtax of 3.8%.
After the proposed tax provision, the top rate on long-term capital gains would increase on qualified dividends. This is true in the case of the highest rate of ordinary income for households that have an adjusted gross income of more than $1 million. And $500,000 in case married couples are filing separately.
Steps to take
In the case of ISOs or incentive stock options taxation, if you are holding the shares for more than two years from grant and 1 year (exercise), the amount you gain will be under the purview of capital gains.
The tax treatment in the case of NQSOs at exercise is fixed but for ISOs, the tax treatment changes when you are selling the stock in the absence of holding periods. If you are having an annual income of $1 million, you will want to re-evaluate your action plan.
However, few experts are apprehensive about whether the high capital gains tax would be applicable for income from all capital gains or will apply only to a part of it.
William D King also reveals that the tax plan proposed by Biden would change the way gifting would be addressed for capital gains. Also, transfers after death will be considered under the new tax proposal.
Another area that the tax proposal will see changes include lowering of the estate tax exemption, which at present is $11.7 million/person and $23.4 million for married couples. This was a subject of discussion during the campaign and might be implemented as well.
This amount will see a decline by default and will slide down to $5.49 million/person at the beginning of 2026 when the provision ceases towards the end of 2025 under TCJA or Tax Cuts & Jobs Act.