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Capital gains: tax cuts a century ago attract attention

Suddenly, capital gains taxes are everywhere in the news.

In late May, the Biden administration announced details of a proposal to raise taxes on Americans’ long-term capital gains income by 82% to more than $ 1 million. Immediately after that, the research site ProPublica Published the article, Claims that the wealthiest Americans do not pay fair taxes, based on IRS data, and states that capital gains are also included.

Then in mid-June the New York Times paper The private-equity fund has reported that through clever planning and political strength, management compensation can be treated as a long-term capital gain. This could reduce the maximum income tax rate from 37% (and payroll tax) to 20%.

This torrent of attention is a good opportunity to consider the complex and expensive topic of income tax on capital gains, especially as the current proposal can affect some of the least wealthy filers.

For a century, US tax law has favored return on investment, called capital gains, to compensate for investment risk. Capital gains are the difference between the original cost (and adjustments) and the selling price of assets such as stocks and real estate when there is a profit. Buy a stock for $ 5,000 and sell it for $ 30,000 to get a capital gain of $ 25,000.

Income tax rate and capital gains rules over time Is changing..under Current lawLong-term profits (due to investments held for more than a year) are subject to the highest rate of 23.8%, but including the 3.8% Medicare tax, the highest rate of wages reaches 40.8%. ..

Also, for a century, tax law has exempted capital gains at death from income tax. this is”Basically step up.. ”

For example, suppose Robert has $ 100,000 worth of shares purchased for $ 10,000. If he sells it before he dies, he is obliged to pay a federal tax of up to $ 21,420 for his $ 90,000 profit. But if he dies without selling his income tax, he goes to zero, leaving more for his heirs. If Robert’s assets exceed $ 11.7 million (2021), Robert’s property will have to pay inheritance tax on the full $ 100,000 of shares, but this levy is often reduced by plan. There is.

Long-term profits also have other tax benefits, such as the ability to reduce or eliminate income from taxable profits by deducting capital loss on unprofitable investments.

However, the most powerful advantage of capital gains is that investors can choose when to earn taxable income depending on the timing of the sale. And if you hold your property until you die, it can never happen. Wage earners do not have this ability. To get cash while alive, some investors avoid sales that cause taxes by borrowing on their assets.

According to Ren Berman, a tax expert at the Tax Policy Center, and Kyle Pomerlow, an American Enterprise Institute, deferring taxes on unsold assets boosts asset growth and is usually more than a blow to inflation. Help things.

“This result is counterintuitive to many, but it’s true,” says Pommerlow.

Both Mr. Berman and Mr. Pommerlow advocate taxing capital gains at the same rate as ordinary income such as wages, which Pommerlow associates with a full deduction of savings. An important result of the 1986 tax reform, when Mr. Berman was an employee of Ronald Reagan’s Treasury, was the highest rate of 28% for both types of income, but it lasted for only a few years.

Today, these benefits make long-term benefits highly desirable for those who can get them, which are often very rich. Approximately 715,000 taxpayers, who have earned more than $ 1 million, report nearly 70% of their total long-term profits this year, according to estimates by members of the Joint Commission on Taxation in Parliament. That’s about $ 800 billion in revenue.

These top earners pay a lot of taxes. Commission staff estimate that they will pay 53% of 2021’s total income tax, including taxes on income other than capital gains, which provides nearly half of US income. If payroll taxes such as social security are included, this percentage is reduced because most of them are paid by people with incomes of less than $ 200,000. Overall, filers who earn more than $ 1 million pay 27% of US income, employment, and excise taxes.

Some critics, such as ProPublica writers, say this is not enough, as the wealth of the wealthiest people is growing much faster than their income. The main reason for the inequality is that taxpayers do not have capital gains on unsold assets, which has led to politicians such as Senator Elizabeth Warren and Senator Bernie Sanders demanding wealth taxes. is.

President Biden’s current proposal does not include wealth tax, but the tax rate on long-term profits has been raised. To provide more funding for social programs, the government wants to raise the highest rate of revenues with sales of more than $ 1 million since late April 2021 from 23.8% to 43.4%.

The proposal will also end tax exemption on capital gains at the time of death. Instead, each individual will be exempt from profits of $ 1 million and $ 250,000 at home. Profit in excess of that amount will be taxable and will be valid for deaths after 2021. This change could increase market efficiency by reducing the “lock-in effect” caused by investors refraining from selling to gain a step up.

In addition to these changes, a few other changes will significantly increase taxes for top-income earners. The Tax Policy Center says that about 1 million filers with incomes between $ 817,000 and $ 3.6 million will be obliged to pay an average of $ 43,000 more tax in 2022, with 120,000 households with incomes above $ 3.6. I’m estimating. A million dollars would borrow an average of 1.3 million dollars more.

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However, the proposal is for income below the $ 400,000 tax increase threshold stated by Mr. Biden, including taxpayers with highly valued long-term assets such as homes, stocks and land in high-value areas. It also affects taxpayers.

“A capital gains rate of 43.4% is pretty scary for older people who bought a home in an area like Boston that was expensive, and now wants to sell, more than 30, 40, or more than 50 years ago.” Says retired Mary Kuhn. A systems analyst living in Brookline, Massachusetts. She and her husband live in a house they bought 42 years ago.

It’s hard to know how many such people are. Using Federal Reserve data, Tax Policy Center specialist Robert McClellaland estimates that there are about 350,000 filers over the age of 70 and earning less than $ 400,000, but have not sold them. If your assets have sufficient capital gains and you have the same amount of assets at the time of death, you can qualify for a higher rate. Double the exemption to $ 2 million per person could affect approximately 150,000 filers.

No matter what the changes, I don’t know if they will eventually pass Congress. stay tuned.

Write to Laura Sanders laura.saunders@wsj.com

Correction and amplification
Mary Kuhns and her husband bought the house 42 years ago. Earlier versions of this article mistakenly stated that they purchased 47 years ago. (Corrected on June 18)

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Capital gains: tax cuts a century ago attract attention

Source link Capital gains: tax cuts a century ago attract attention

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