Would Biden’s capital gains tax hike affect you? Probably not

President Joe Biden recently unveiled a plan to increase capital gains taxes, and the numbers back up what the administration has been saying for some time: Unless you make a lot of money, you probably won’t feel any direct impact from the proposed changes.

Under the proposal, the highest income tax rate would return to 39.6% (where it stood from 2013 to 2017), up from the current 37%. Along with that increase, the Biden administration’s plan would tax capital gains — profits from the sale of certain assets or investments — at the same rate as ordinary income for households earning more than $1 million, and that’s where the biggest change would happen.

Currently, the country’s highest earners typically pay a 20% capital gains tax. If Biden’s proposal makes it through Congress, that rate would nearly double to 39.6%. And that doesn’t include the 3.8% net investment income tax that would apply to some or any state capital gains taxes, which would be added on top of the federal tax.

According to the Biden administration, very few Americans would feel the effects of a federal increase: A scant 0.3% of U.S. households earn more than $1 million a year.

Investors using a 401(k) — one of the most common investment vehicles in the country — are especially unaffected by the proposed changes for a specific (and extremely beneficial) reason, says Serina Shyu, a certified financial planner and an advisor with Delta Community Retirement & Investment Services.

“Your average person who has most of his or her wealth accumulated in a 401(k) plan shouldn’t worry about this particular proposal because capital gains taxes don’t apply to qualified retirement plans like 401(k)s,” Shyu said.

Put simply, if this proposal makes it into law, and that’s still an if considering it would have to make it through Congress as is, it’s unlikely the capital gains component will affect the vast majority of U.S. investors.

But if this affects the broader market, should I sell now?

First, this increase is far from certain, so we’ll need to see how the proposal plays out.

“This is merely a proposal and Congress will absolutely adjust that proposed percentage as the two chambers compromise on what the final version will look like,” Shyu said.

Also, basing any financial decision on a politician’s plan likely isn’t a sound strategy. For the majority of investors, blocking out the headlines and sticking with an investment game plan is an unbeaten strategy, says Michael Murphy, managing partner of venture capital firm Rosecliff Ventures.

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