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This is taxes made simple. The only pod cast that gives you

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the tax information you need without

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getting too far into the weeds. So it's not often that the tax news

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of the week affects the stock market,

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but when you talk about doubling taxes

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for capital gains, the market tends to

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not love that the Biden administration

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indicated this week that they are aiming

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to raise the long-term capital gains rate.

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To 39.6%, which would actually be 43.4%.

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When you count in the net

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investment income tax, this would

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only be for taxpayers making more

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than a million dollars a year.

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And I'm not here to debate the merit of

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this tax increase, but I can tell you,

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it's going to have an impact on what the

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wealthy are doing with their investments.

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I can also tell you that there are

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people who would definitely not

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fit the stereotypical definition of

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wealthy that will get hit by this.

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Think of your middle-class everyday

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employee at a startup who has a

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one-time liquidity event when their

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company either gets acquired or IPOs.

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Even though it's a one-time event and

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they're not otherwise wealthy, they're

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going to feel this thing of this. So if you have reason to fear that

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you're going to be a target of this

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higher tax regime on your capital gains,

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here's what you should be considering.

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Number one, you might want to sell

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some or all of your stock before the

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end of 2021 to lock in the current

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long-term capital gains tax rates.

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If you go this route, you'll want to wait

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until later in the year, until there's

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more clarity about which year these new

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tax rates would be effective, I would

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warn however that you should consider more

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than just the tax consequences in terms

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of when you time the sale of your stock. If the stock went up by 50% after you

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sold it, you're not going to be so

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happy about your 20% savings on taxes.

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It's easy as a CPA to advise

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clients, to do the most tax

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advantage, move available to them. But sometimes you've got to put on

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your investment hat and say, well,

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taxes are an important consideration to

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any investment, but they're certainly

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not the only consideration at play. Number two, you might want to consider

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a truly long-term hold on your stocks

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to try to outlast this tax regime

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until a Republican takes office.

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Again, this is definitely the long

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game, but most studies out there

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indicate that true wealth from the

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stock market is attained from staying

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in the right stocks over a long

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time horizon, or as a more nuanced

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strategy, you could sell your shares

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and trenches at levels that will keep

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you under the $1 million Mark each year.

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If your income levels are otherwise low enough. So if you're at an income level below

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a million dollars, most years, without

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respect to capital gains say $700,000

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in a given year, you could sell stock

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representing up to $300,000 in long-term

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capital gains without getting dinged,

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or you might structure a certain year to

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take a hundred percent bonus depreciation.

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If you're a business owner or some other

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one time significant reduction to your

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taxable income, to open up room, to

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sell an even larger chunk of your stock.

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Number three. If you have to sell while tax rates are

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high, you're going to want to keep an

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eye on tax deferral opportunities, such

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as an opportunity zone investment, which

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could defer the tax until such point

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that rates come back down to earth.

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There are also other strategies

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out there that you want to vet

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before a liquidity event happens. That's going to force you to sell

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before you have a plan in place.

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And one last very important consideration

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for entrepreneurs is to strongly

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consider going the C Corp route. Yes.

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I know that corporate tax rates are

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likely going to go from 21% to 28%, but

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many startups are either unprofitable or

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have NLLs do utilize when they do have

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a profit up until around the point where

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an exit could come into the picture.

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If the goal is an eventual exit, holding

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qualified small business stock in your

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company could save you 43.4% since

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the gains could be entirely tax-free.

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Of course, there are many nuances

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with how this works, like being a

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certain type of business and holding

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the stock for at least five years.

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But you'd be wise to get this right

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from the start, because in many

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cases you'll need to start out as

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a C Corp to qualify Darkhorse CPAs.

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We'll make sure you get this right anyway.

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That's it for now? Thanks for tuning into

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TMS or taxes made simple.

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If you're not into the whole

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brevity thing because there's

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teams and then there's TMS.

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See you next week.