As Democrats wrestle over funding for their $3.5 trillion spending package, some investors may be itching to sell appreciated assets ahead of possible tax hikes. But the decision is more complex than rate increases alone. House Democrats have floated raising the top federal long-term capital gains tax to 25% from 20%, according to a summary released by the Ways and Means Committee. If enacted, the highest earners would pay a total of 28.8% combined with the 3.8% surcharge on net investment income. The proposed changes are retroactive for sales after Sept. 13, 2021, making it tough to lock in lower rates. However, lawmakers may still push the effective date. In the meantime, investors eager to offload assets need to assess their entire tax picture before selling, financial experts say. "When it comes to taxes, the devil's always in the details," said certified financial planner Peter Palion, founder of Master Plan Advisory in East Norwich, New York. Top earners may be tempted to sell before the proposed changes to save 5% in taxes. But taking those gains off the table may trigger higher costs elsewhere, he said. Risks for retirees Whether someone's nearing retirement or they have already left the workforce, selling assets at a profit increases their modified adjusted gross income, and may have other consequences, Palion said. Retirees should consider how having a higher income could affect their monthly Medicare costs in the future. Medicare uses your modified adjusted gross income from two years prior for premiums – meaning your 2021 income determines whether you'll see higher premiums in 2023. Investors with more than $88,000 ($176,000 for joint filers) modified adjusted gross income for 2021 will pay an extra surcharge every month, known as the Income Related Monthly Adjustment Amount or IRMAA, for Medicare Part B and Part D . Surcharges for Part B medical insurance and Part D prescription drug coverage in 2021 may be as much as $504.90 and $77.10, respectively. Another possible pitfall, Social Security taxes , kick in once half of someone's benefits plus modified adjusted gross income exceeds $25,000 ($32,000 for married filers), making up to 50% of Social Security income taxable. Once the same calculation passes $34,000 ($44,000 for joint returns), up to 85% of someone's benefits may be taxable. Savings for heirs Moreover, if older investors want to pass assets to their children, they may defer taxes by holding their investments until death, Palion said. This way, the heirs' inheritance gets a so-called step-up in basis, which generally adjusts the assets' purchase price to the value on the date of death, he said. The benefit of the step-up in basis is that the heir receives the asset without facing taxes on what could be years' worth of unrealized gains. Younger investors looking to sell their assets should also watch their adjusted gross income, as it may negatively affect financial aid, income-based student loan payments, child tax credits and more. "It's not a single-faceted question of 20% versus 25%," Palion said. "You really need to sit down, take a couple of deep breaths and speak with your CPA."
House Ways and Means Committee ChairmanRep. Richard Neal, D-Mass., (left) and ranking member Kevin Brady, R-Texas.
Chip Somodevilla | Getty Images News | Getty Images
As Democrats wrestle over funding for their $3.5 trillion spending package, some investors may be itching to sell appreciated assets ahead of possible tax hikes.
But the decision is more complex than rate increases alone.