Impacts of recent Capital Gains law proposal

[rsdill2]

Originally Posted by chriskim

Stock markets has been tanking and investors are cashing out.

No comment on your main question. But I'm confused about this statement. Which stock market are you watching?

Rates of return for key US indices are attached below.

I can't see how you deduce that markets have been tanking.

[hcv123]

Originally Posted by rsdill2

No comment on your main question. But I'm confused about this statement. Which stock market are you watching?

Rates of return for key US indices are attached below.

I can't see how you deduce that markets have been tanking.

I have the same question. markets dropped a bit on the news yesterday, but a LOOOOONG way from "tanking"?

[packs]

I still don't understand where the POV that regular Joe's are selling Apple stock to buy cards comes from. No one is doing that.

[bigtrain]

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

[Casey2296]

Originally Posted by bigtrain

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

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.

[bobbyw8469]

Gotta pay for the green new something and all the cities being burned down some how. Tax away.

[TUM301]

Even crime wouldn`t pay if the government ran it !

[Johnny630]

"Nothing is so permanent as a temporary government program”

-Milton Friedman

[jayshum]

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.

The highest rate someone is taxed at does not apply to every dollar earned. It applies to the amount above a certain level. In this case, if capital gains are taxed at the same rate as a person's earnings, then the amount earned above $1 million would be taxed at around 40% while the amount below would be taxed at the lower rates used for the different tax brackets currently in effect so the amount they paid in taxes would be considerably less than the $600,000 you indicate. Also, it's not like they would be going from paying nothing in taxes to whatever the total amount they would pay under any new tax law is, but that seems to be what you are implying.

[packs]

There might be one person in the world who fits that scenario.

[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.

[Rhotchkiss]

Originally Posted by BobC

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 dont mind eliminating the step-up of basis on death to the extent that assets are passed tax free. In other words, if the estate tax exemption is $5mm, and someone dies and leaves a $5mm asset, with a $500k basis, to their heirs, I have no problem with the heirs taking the asset with a $500k carryover basis. That is sound tax policy - defer the tax until realization, not eliminate it. At the same time, I would fully expect that any asset subject to estate tax would be passed to heirs with a stepped up basis because tax has already been paid. That too is sound tax policy. Query what happens when an estate worth $20mm is passed, $5mm is exempt, and tax is paid on $15mm of wealth/value - how do you determine which assets get a step up and which get a carry over basis? I guess that is what regs are for.....

[BobC]

YYyYyyyyyy

Originally Posted by Rhotchkiss

I dont mind eliminating the step-up of basis on death to the extent that assets are passed tax free. In other words, if the estate tax exemption is $5mm, and someone dies and leaves a $5mm asset, with a $500k basis, to their heirs, I have no problem with the heirs taking the asset with a $500k carryover basis. That is sound tax policy - defer the tax until realization, not eliminate it. At the same time, I would fully expect that any asset subject to estate tax would be passed to heirs with a stepped up basis because tax has already been paid. That too is sound tax policy. Query what happens when an estate worth $20mm is passed, $5mm is exempt, and tax is paid on $15mm of wealth/value - how do you determine which assets get a step up and which get a carry over basis? I guess that is what regs are for.....

Unlike most all the other tax law proposals they have been talking about, no one has put forth any real specifics yet as to exactly how eliminating the stepping-up of basis for inherited assets would be implemented and what, if any, effect it may have in regards to estate taxes or other possible taxes that may come out of all these potential changes they are proposing. And that is why I said this is an area to maybe keep an eye on since it is so uncertain.

As you said, it makes sense that any inherited assets that are subject to the estate tax would get passed through with a stepped-up basis, so they aren't subjected to a form of double taxation. But many would argue that the estate tax itself is already a serious violation of the no double taxation rule in that assets a person has acquired over their entire lifetime (with money they worked hard for and already paid tax on) for the benefit of themselves and their family, is being suddenly taxed again now that they have passed. But estate taxes are a form of excise tax and not an income tax, so therefore in the government's eye, I don't think they'd look at it as double taxation. The estate (and gift) tax exemption is in place for various reasons, like allowing people to pass some of their hard earned assets on to their heirs without the government imposing a politically unpopular estate tax on every single person that passes. Also, without such an exemption, just think of the increase in tax filings that would suddenly hit the IRS, not like they aren't already overworked, understaffed and underbudgeted with all the covid and stimulus activity and changes they are going through now. Historically, up to now, estate tax returns are only filed for about 1%-2% of the people that pass each year, and similarly, estate taxes paid each year only cover about 1%-2% of the federal annual budget.

So up till now, they kind of treated the estate tax exemption like the standard deduction for personal income tax purposes. You use both to reduce the amount ultimately subject to the respective estate/income tax, but both are still part of the tax base. And that is why under the current law, the portion of a deceden's assets that aren't actually taxed because they fall under this estate exemption amount are still considered as having been subject to the estate tax, just at a 0% estate tax rate, and are therefore still eligble for the step-up in basis to the decedent's heirs.

One of my concerns is that in the future they may change the estate tax laws so that inherited assets on which no estate taxes are paid because of the estate exemption do not get a basis step-up. Along with the great question you pointed out about how do you then decide which inherited assets get stepped-up and which ones don't in an estate that is partially taxable and partially not taxable (I can only imagine the treasury regs they would come with to explain how to do that), you would now have to have everyone keeping track of their tax basis for all their assets so when they pass on the executor of their estate can be responsible for letting all the heirs know what tax basis they now have in what they inherit. So for someone who leaves a lifelong card collection, the executor better hope they find the decedent kept great records so they can determine what the collection may have as a tax basis.

And the worst part is, if something like that does get enacted it will potentionally effect everyone, not just those making more than the $400K a year they have been alluding to. Let's face it, the government wants more money and just going after people making more than $400K a year may not cut it for what they need. Planning for and being concerned with estate taxes is something the average person doesn't ever really think about. Enacting new laws like this could change that, and possibly create a real nightmare and more headaches and work for accountants, attorneys, courts, the IRS, and anyone else involved with estates going forward.

And don't forget, they actually did away with the federal estate tax for one year, in 2010. Actually, Congress let it lapse due to their inaction on the issue. This also did away with the usual basis step-up rules for inherited assets that same year as a result. Congress could have gone ahead and just done away with estate taxes (and the basis step-up of assets) going forward then. But before the end of 2010, they finally enacted legislation to reinstate the federal estate tax laws in 2011 to approximately what they had been before 2010. They also gave executors of estates of people who passed away in 2010 the option of either choosing to file and pay estate taxes after all, and to therefore get the normal basis step-up, or to forego paying federal estate taxes and not get the normal basis step. I'm guessing a main reason that Congress decided to reinstate the estate tax laws as they had been was because even though it may only have brought in 1%-2% of the annual federal budget, they didn't want to take a chance and forego that normal cash flow stream.

I also remember 2010 was the year George Steinbrenner died and there was a lot of speculation as to whether or not they would pay the estate tax on his ownership of the Yankees. (See, even got a baseball reference in there to try and keep it on topic.) No idea which way they ended up going.

Bottom line is to watch this and see what they might end up doing tax-wise.

[egri]

Originally Posted by BobC

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.

My concern with that is the brackets come down over time, while rates generally go up. Adjusted for inflation, when the income tax was introduced, the top bracket was 7% on incomes above $12.9 million. Now it's 37% on everything above $500,000. Four years after the tax started, the top rate was 67%, and with the exception of a few years in the 1920s, it stayed above 60% (and often above 70/80/90%) until the late 1980s. Since then it's been going back up, with occasional cuts never sending it back down as low as it was before. If someone is smart enough to build a successful business from scratch, they're probably also smart enough to look at that trend, then find the Cayman Islands on a map, as Sir John Templeton did.

[BobC]

Originally Posted by egri

My concern with that is the brackets come down over time, while rates generally go up. Adjusted for inflation, when the income tax was introduced, the top bracket was 7% on incomes above $12.9 million. Now it's 37% on everything above $500,000. Four years after the tax started, the top rate was 67%, and with the exception of a few years in the 1920s, it stayed above 60% (and often above 70/80/90%) until the late 1980s. Since then it's been going back up, with occasional cuts never sending it back down as low as it was before. If someone is smart enough to build a successful business from scratch, they're probably also smart enough to look at that trend, then find the Cayman Islands on a map, as Sir John Templeton did.

With the Tax Reform Act of 1986 they dropped the top individual tax bracket rate from 50.0% down to 38.5% on taxable income in excess of $54,000 for single individuals, starting in 1986. In contrast, the top individual tax bracket rate for 2020 is 37.0% on taxable income in excess of $514,800 for single individuals. And I believe the highest the individual tax bracket rate has been during this period from 1986 was 39.6%, with the lowest top bracket rate during this same period at 35.0%. So in truth the top tax bracket rate is actually lower today than it was about 35 years ago in 1986, and during those ensuing 35 years has never been more than 1.1% higher, at a top bracket rate of 39.6%.

As I noted above, the top individual tax bracket rate for single taxpayers started at $54,000 back in 1986, and has since risen to now starting at $514,800, almost 10 times what the top bracket rate started at back in 1986. Meanwhile, in looking up a few measures of inflation in time over that same 35 year period from 1986 to today I found:

The average annual inflation rate over that 35 year period is 2.55%

$1 in 1986 adjusted for inflation is worth $2.42 today in 2021

The CPI (consumer price index) in 1986 = 109.600

The CPI in 2021 = 264.877

Given all that, I think an almost ten times increase in the amount at which an individual starts to pay income taxes at the highest marginal tax rate over the same 35 year period as these inflation measures is not too shabby. So exactly where are you getting your data from that indicates that since the late 1980's that the top marginal tax rates have been going up, and that the tax brackets have been going down?

As for business owners potentially moving away from the U.S. if they begin to feel their tax burden is becoming too heavy, that is one reason that all the rhetoric spewed about having the rich and well-to-do pay an even bigger share of their income as taxes is just that, rhetoric, to appease a portion of the voting masses. The government knows they can't afford to completely alienate a good portion of their business community and its leaders, for fear they would pull up and move elsewhere. The business world has changed so much since WW2 with major leaps in technology, tranportation/logistics, computers and the internet, and the globalization of the marketplace. Companies that used to just worry about producing/providing for the U.S. market are now able to go global and easily reach and deal with customers and suppliers anywhere in the world. And that has become even more pronounced in the midst of the covid pandemic as companies and people started being forced to work more remotely than they ever had been before. And as a result, to pick up and move business operations and people to other parts of the world may not be as difficult and far-fetched as previously may have been thought. So now the federal government does have to pay attention to how they tax and treat businesses and their owners else possibly lose them to other countries. Luckily we are still one of, if not, the top consumer economies in the world. That will keep a majority of businesses from ever leaving due to the need to be here in the U.S. to fill our consumer needs. And then of course, despite all the negative things that have occurred in recent times, an overwhelming majority of Americans still consider this the greatest country on the planet and would rather live in the U.S. than anywhere else in the world. But despite all that, our government will likely still not go overboard with tax increases to the business community and its owners/leaders for fear of starting to change such pro-U.S. thinking.

[gawaintheknight]

+1

Originally Posted by bigtrain

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

[nolemmings]

I've stumbled upon a way to ignore the capital gains tax and my system has remained tried and true, mastered to the point that it's automatic. I just sell everything at a loss.

It's either idiot proof or proof that I'm an idiot--I'm not sure.