Helping clients avoid capital gains taxes

There are a number of ways that advisors can help their clients avoid a capital gains tax hit. These strategies are not new, but many will likely become more prominent should the Biden proposal pass. A few examples include:

Focus on asset location. Where possible, hold assets that will be subject to significant capital gains in retirement accounts. This could mean holding growth stocks in traditional or Roth IRAs, as well as in a 401(k) or other employer-sponsored retirement plans. This could also include self-directed retirement accounts for alternative assets such as real estate, cryptocurrency and a host of others.
Sell appreciated assets before the new capital gains tax rates go into effect if this strategy would be beneficial in light of your client's overall situation.
Consider converting assets to a Roth account. This can make a great deal of sense due to the current low overall income tax rates and may prove to be a good way to avoid some of the potential capital gains tax hit your clients could face if these new rules are enacted. It can also be beneficial from an estate planning perspective.
Wealthy clients should review their estate plans in light of the potential changes to the step-up in basis rules to look at ways their heirs could avoid some or all of a potential tax hit on inherited assets. They may want to reconfigure some things in light of this potential change.
Consider donating appreciated assets to charity. Donating appreciated stock offers not only a charitable tax deduction based on the market value of the shares, but also avoids the payment of any capital gains taxes. Beyond a direct donation of assets, a donor-advised fund might be an alternative for clients to consider.
Use tax-loss harvesting to offset any potential capital gains when rebalancing client portfolios.

While nobody can accurately predict what the final capital gains piece of the tax and spending package will look like, we think it's fair to say there will be a lot of negotiation on the final version of any changes to the capital gains tax rate.

Instant Insights /

What you need to know about Biden's capital gains tax plan

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