Biden's capital gains proposal is 'more of a wishlist': Seltzer Business Management

Seltzer Business Management CPA/PFS Rob Seltzer joins Yahoo Finance Live to discuss how Biden’s potential capital gains tax changes could impact tax payers.

Video Transcript

AKIKO FUJITA: President Joe Biden doubling down on his proposals to increase taxes on the wealthiest Americans in his address to Congress this week. His American Families Plan seeks to raise $1.5 trillion on tax hikes for capital gains, as well as ordinary income. He's also pushing to increase tax audits for those who are earning more than $400,000 a year.

For discussion on the implications there, let's bring in Rob Seltzer, Seltzer Business Management. Rob, it's good to talk to you today. Let me just first ask you how realistic you think this is. When you look at all the structuring that needs to happen-- obviously, I'm not going to have your way on the politics-- but when we talk about an increase, ultimately where do you anticipate it to fall?

ROB SELTZER: Well, the politics, I think, are important, because there's a very-- it's a razor thin majority in the Senate. So it's more of a wishlist, and there's going to have to be some compromise there. I think that the ordinary income rate will go up from 37 to 39.6.

But the capital gains, I just-- I would be surprised if it ends up being what he's wanting. Because you know, when you raise taxes too high, it's counterproductive in terms of raising revenue. So people would just hold onto items as opposed to selling them, which would defeat the purpose of trying to raise additional revenue. In addition, he needs to have everyone on board to make that happen. So I don't see that 39.6 affecting, you know, the millionaires, so to speak.

It's somewhat misleading, because you know, it's not people who are making $1 million each year. It's, you know, I've had my home-- I'm in Los Angeles, and to have a $1 million capital gain on a piece of real estate is not unusual. And so you would be, quote unquote, "a millionaire" just for that year and then take a real big haircut.

I think one thing that people can do to try to plan for this is, you know, even if it's higher to some degree, is to do installment sales so that the gain is reflected over a period of years as opposed to taking it in one fell swoop. And that's easier with blocks of stock than it is with real estate, where you have to structure the transaction accordingly.

ZACK GUZMAN: For sure. And congrats, by the way, on the real estate appreciation out there. But when we look at maybe some of the other moves that people take when it comes to the wealthy around those things, I mean, deferring capital gains is something that the wealthy do very well.

So I'm not sure which one of these seems most likely to actually have an impact when it comes to raising revenues. I mean, obviously it seems like rising-- raising taxes when it comes to personal income, going to probably be easier. Corporate tax rate, yeah, that'll come up. When it comes to capital gains, though, what are those loopholes that really need to be closed when it comes to the way that the wealthy, though they say they want to be taxed higher frequently in the media, the loopholes that they might use to avoid those things?

ROB SELTZER: I think the installment sale is one way of doing it. One thing that people need to realize-- you know, with my clients and even with some of the wealthier ones, they've got millions of dollars in pension plans that will be rollover IRAs. That's all taxed as ordinary income upon the distributions. So there's-- the capital gains tax really doesn't affect that. It's only on the personal portfolios.

But I think that people will try to do loss harvesting and be-- you know, people try to be tax efficient in managing their portfolio now. But I think it's even more critical if rates rise. And I think they will. I think the ordinary income rate has been there recently, so raising from 37 to 39.6 isn't a big push.

I think that raising the corporate tax from 21% will happen. Will he get 28%? I don't know about that. It'll probably end up being a compromise, maybe 25%. But--

AKIKO FUJITA: So Rob, if there are those who are watching that could potentially fall within the tax bracket the president has proposed, what do you advise that they do?

ROB SELTZER: If you're talking about ordinary income, the rates, trying to use it-- if you have your own business and you have the ordinary income, then using a defined benefit pension plan is probably the most powerful way to shelter ordinary income. I have clients that--

AKIKO FUJITA: And the capital gains rate change? What are the strategies for that? What do you tell people to do as they look ahead to potential changes there?

ROB SELTZER: I think if you can, do-- do the installment sale, like I said before, because then you'll keep your AGI below the rate where it triggers. And by doing so, if you have-- let's say you have a $1 million gain, and let's say 200 of it would not, you know, put you into that higher level. You do an installment sale over five years, you avoid that tax. It's not a tax deferral. It's lowering the tax completely.

So that's one way of doing it. And then trying to match the losses with the gains so that you can do loss harvesting to try to reduce your gains.

ZACK GUZMAN: All right. Rob Seltzer, I might have to call you back and dig into some details here. But appreciate you talking bigger picture with us on today's show. Rob Seltzer at Seltzer Business Management, appreciate it.