Impacts of recent Capital Gains law proposal

[BobC]

Originally Posted by Casey2296

Here's a scenario where it would also apply.

Let's say an immigrant family came to NY 40 years ago with nothing, started a small business, say a restaurant, grocery, hardware store etc. spent their working lives not paying themselves a whole bunch, sacrificing days off, vacations, etc. raising a couple of kids who they want to leave a better life to than they had.

Now they're ready to retire. So they post their small business for sale and find a buyer that nets them just over a million dollars. Finally, a reward for 40 years of keeping your nose clean, working hard, being a part of your community, etc.

Some folks would call that the "American Dream".

With the proposed tax increase, which would put the rate at the highest in the world, and New York's current tax rate, that immigrant family would pay almost $600,000 to the State & Feds in taxes on that million dollar gain. Leaving them just over $400,000 for their retirement. Hardly the rich folks people love to hate.

The government also has a funny way of working that million dollar limit down over the years until it affects more and more people. Aka coming soon to a tax bracket near you.

As an earlier poster, Jayshum, accurately pointed out, individuals are subject to graduated federal tax rates or tax brackets. You don't end up paying the highest possible rate on every single dollar of taxable income that you earn. At least not under current federal tax law, and I doubt such a new tax law allowing that to happen would ever be passed.

And for your specific example, I would hope that such an intelligent, hardworking, and successful business owning family would have paired up along the way with a good tax person who would assist them with such a sale. For if your currently incorrect position that the couple in your scenario would end up paying almost 60% of their total net taxable profit from the sale of their business in federal and state taxes should the proposed capital gains tax laws being discussed get enacted, and that resulting tax hit was largely due to the couple exceeding the $1MM taxable income threshold set by such a new tax law, a smart tax advisor would simply suggest they structure the payment(s) for the business sale so they don't receive all the sales proceeds in one single tax year. That way the transaction is afforded installment sales treatment and the resulting gain/profit can be spread over more than a single tax year. And by doing this you hopefully keep the couple from crossing the $1MM taxable income threshold that ends up triggering the more onerous tax rates the proposed law would put into effect. And it could have the added beneficial tax saving effect of allowing the couple to take advantage of the lower tax bracket rates for more than just a single year also.

Also, don't forget that federal income taxes are levied only on the NET profit/gain from the business being sold. I would assume that this couple may have some basis in inventory, fixtures, buildings, land, and other possible assets that they had acquired over the years in the operation of the business. They would also be receiving their basis in these assets as part of the sales proceeds from selling their business, and these dollars simply repaying them for their basis in those asssets are not taxed. So the end result should hopefully be more dollars in the couple's retirement pocket than the $400K+ amount you mentioned.

If you really want to be concerned about some of these proposed new tax laws, also pay attention to the idea they have about doing away with stepped-up basis when someone passes away. There is no specific income or dollar amount threshold being mentioned, nor any true idea of what this could end up being and who it could effect. For now though under current laws, when someone passes away their assets are inventoried, valued, and depending on the total value of all the assets , prior gifts, and possibly many other factors, the estate may be subject to and owe a federal estate tax on the decendent's assets. Meanwhile, the assets that are then left to the decedent's children or others (not including a surviving spouse) are generally given a stepped-up basis to their FMV (fair market value) at the time of the decedent's passing. So under current law, if you passed away and left your lifetime card collection to your children, their tax basis would most likely be the FMV of the collection on the day you passed. So assuming your kids consign the collection to an auction house for sale not long after your passing, it will most likely sell for close to that FMV, and probably results in little to no taxable gain to your kids, even if had acquired cards decades ago at signicantly less than what they are now worth today. So in a possible worst case scenario, if there is a new tax law enacted that does away with this basis step-up, in my example the tax basis of your collection now in your children's hands could be what you originally paid for everything. So now if they auction everything off, they could end up with significant gains that they would owe taxes on. And another potential issue is, how do your kids know what your original basis in the collection even is? Now for someone with a signicant collection, they are going to want to somehow document and support their tax basis in that collection so they don't make a problem for their heirs. Just something else to be aware of and to keep an eye on to see where it may go.

I do wish people would be a little more careful on the forum when tax questions are brought up as they may not know all the pertinent facts and circumstances when responding, thereby possibly giving some people reading such threads a wrong or innaccurate idea or answer. There are often exceptions and special rules/conditions that impact or vary the answer of a particular tax question. And in the case of discussions involving potential new or proposed tax laws, take everything with a big grain of salt until something is actually passed and signed into law.