Cut capital gains tax?

[aaronc879]

Looks like President Trump is planning to cut the capital gains tax by executive order. Not sure if that is even legal to do but lets assume that it is. Is this a good thing for the majority of the people or only the wealthy? I would think that many people on here would actually want to pay the tax because it gives them income to qualify for ACA. Thoughts?

[RunningBum]

The idea seems to be to inflation index the cost basis, rather than cutting the rate, correct?

I don't get the impression there are that many here who are struggling to get above Medicaid and into the ACA, and are doing it by taking cap gains. I didn't say none, but I'm guessing very few.

Clearly it's a boon for those wealthy enough to invest in the stock market outside of their retirement accounts. That is not the majority of people, though I don't have statistics to back it up.

As far as the economy goes, long term it hurts tax revenue, though probably a lot gets step-up basis anyway. Mostly people will probably just sell medium gainers and reinvest in other things, so it's just money shifting. Maybe a small spending boost. The high gainers might stay put, as stocks like AAPL far outgrew inflation so there would still be a lot of tax due.

[GrayHare]

Good thing depends on how much money one has with gains pending. This might bring in more tax revenue, but only temporarily and at the detriment of future revenue. Such a change makes retirement accounts less attractive since there cap gains become treated as higher-taxed ordinary income.

[marko]

Quote:

Originally Posted by aaronc879 I would think that many people on here would actually want to pay the tax because it gives them income to qualify for ACA.

Can you explain this comment? How does paying tax give you income?

[NW-Bound]

Quote:

Originally Posted by RunningBum The idea seems to be to inflation index the cost basis, rather than cutting the rate, correct?

I did not know about this. Just looked it up, and indeed it was about taxing only the excess portion of capital gain over inflation.

If this comes to pass, then there's an even higher disparity between the treatments of capital gain and interest, if tax on the latter is not also corrected for inflation.

About the legality, are tax laws not passed by Congress, and not in the jurisdiction of the executive branch?

[RunningBum]

Quote:

Originally Posted by marko Can you explain this comment? How does paying tax give you income?

I think what he means is, if you are below the ACA minimum, you would have to go on Medicaid (maybe only some states?). So people find ways to generate a little more income to make the ACA minimum. Capital gains is one way. You can only raise your MAGI if you make a gain on the sale. As I said, my understanding is that the proposal is to inflation adjust your basis.

So, at one point you might have sold $5000 worth of stock with a $4000 basis to get the extra $1000 in income you might need to reach the ACA minimum. If they inflation adjust your basis to $5000, your gain would be 0 and it wouldn't help raise your MAGI.

[marko]

Quote:

Originally Posted by RunningBum I think what he means is, if you are below the ACA minimum, you would have to go on Medicaid (maybe only some states?). So people find ways to generate a little more income to make the ACA minimum. Capital gains is one way. You can only raise your MAGI if you make a gain on the sale. As I said, my understanding is that the proposal is to inflation adjust your basis. So, at one point you might have sold $5000 worth of stock with a $4000 basis to get the extra $1000 in income you might need to reach the ACA minimum. If they inflation adjust your basis to $5000, your gain would be 0 and it wouldn't help raise your MAGI.

Ah! Thanks. I was just thinking of CGs via MFs at year's end. Sorry, half-way through my Manhattan....

[aaronc879]

Quote:

Originally Posted by RunningBum I think what he means is, if you are below the ACA minimum, you would have to go on Medicaid (maybe only some states?). So people find ways to generate a little more income to make the ACA minimum. Capital gains is one way. You can only raise your MAGI if you make a gain on the sale. As I said, my understanding is that the proposal is to inflation adjust your basis. So, at one point you might have sold $5000 worth of stock with a $4000 basis to get the extra $1000 in income you might need to reach the ACA minimum. If they inflation adjust your basis to $5000, your gain would be 0 and it wouldn't help raise your MAGI.

Yes, that is what I meant. I forgot that most on this forum are very well off and don't need to 'find' extra income to qualify for ACA, they need to figure out how to limit income to qualify for ACA. If I FIREd I would be struggling to qualify on the low end so extra capital gains income could be helpful to me.

[NW-Bound]

One way to help with the above problem is to not buy index funds, but individual stocks or sector funds that together resemble the index.

Due to sector rotation, very often some sectors would go hot, and others cool down. Looking at the whole market, it may be flat, but you can find the hot sectors and sell them to realize some gain, then buy them back immediately. The wash sale rule does not apply here, because you sell with a gain, not a loss.

[ERD50]

Is the idea to apply this to losses too? That could be big write off for some, say an asset purchased for $10,000 in 1999 was sold for $9,000 this year. Instead of a $1,000 loss, would you adjust the cost basis to inflation, and use $15,371.67 - $9,000 for a $6,371.67 loss?

https://www.usinflationcalculator.com/

We have discussed this before, and I do think adjusting cap gains to inflation is the right thing to do. Currently, for the same purchase and sell numbers, someone who owned something for 1 year and a day is taxed the same as someone who held for 30 years. Obviously, inflation changed the actual value of that over 30 years.

-ERD50

[NW-Bound]

Quote:

Originally Posted by ERD50 Is the idea to apply this to losses too? That could be big write off for some, say an asset purchased for $10,000 in 1999 was sold for $9,000 this year. Instead of a $1,000 loss, would you adjust the cost basis to inflation, and use $15,371.67 - $9,000 for a $6,371.67 loss? https://www.usinflationcalculator.com/ We have discussed this before, and I do think adjusting cap gains to inflation is the right thing to do. Currently, for the same purchase and sell numbers, someone who owned something for 1 year and a day is taxed the same as someone who held for 30 years. Obviously, inflation changed the actual value of that over 30 years. -ERD50

Inflation indexing makes sense to me too, but perhaps this could be accompanied with taxing capital gains at regular income tax rates.

Else, investment income has such a high advantage over earned income.

Again, something like this should be passed by Congress, not an executive order.

[Independent]

This reduces taxes for a small slice of Americans:

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As of 2013, the top 1% of households owned 38% of stock market wealth. ... the top 10% own 81% of stock wealth, the next 10% (80th to 90th percentile) own 11% and the bottom 80% own 8%.

But, I'm pretty confident the tax impact is even more skewed than the ownership. As we look down the pyramid, we'll find that higher percents of the stocks that individuals own are inside tax qualified plans. The capital gains treatment isn't relevant for them.

Furthermore, the numbers above sort families based on income, not wealth. If we sorted by wealth we'd get even more concentration at the top.

Yes, some people on this board have enough wealth to hold some of it outside qualified plans. But, they have trivial amounts compared to the small slice at the top.

https://en.wikipedia.org/wiki/Wealth...p_distribution

And, we already have a $1 trillion annual deficit.

[GrayHare]

Taxing only the real cap gain is an interesting idea, though it adds another level of complexity to the cost basis calculation. Someone who has held a MF on reinvest would have to apply a different inflation index for each reinvestment, at least for ones old enough to not have been tracked by a brokerage.

[scrabbler1]

Quote:

Originally Posted by NW-Bound Inflation indexing makes sense to me too, but perhaps this could be accompanied with taxing capital gains at regular income tax rates. Else, investment income has such a high advantage over earned income. Again, something like this should be passed by Congress, not an executive order.

I agree. I am okay with indexing as long whatever income remains gets taxed as ordinary income. But given that, I favor only a somewhat complicated partial indexing.

[ERD50]

Quote:

Originally Posted by NW-Bound Inflation indexing makes sense to me too, but perhaps this could be accompanied with taxing capital gains at regular income tax rates. Else, investment income has such a high advantage over earned income. Again, something like this should be passed by Congress, not an executive order.

Yes, but supposedly the current LTCG rates are to encourage investment. I'm not saying that's right/wrong/good/bad, but if we want to encourage investment with a preferential rate for a 1.1 year investment where inflation had a minimal effect, it seems that should apply for someone who invested years ago.

Agree it should go through Congress.

Quote:

Originally Posted by GrayHare Taxing only the real cap gain is an interesting idea, though it adds another level of complexity to the cost basis calculation. Someone who has held a MF on reinvest would have to apply a different inflation index for each reinvestment, at least for ones old enough to not have been tracked by a brokerage.

That seems tricky, but you would need to know all of these dollar amounts (at least, maybe shares and price as well if you did any selling along the way?) to track your cost basis now, so assuming you'd also have the dates, the computer can do it easily.

-ERD50

[GrayHare]

Quote:

Originally Posted by ERD50 That seems tricky, but you would need to know all of these dollar amounts (at least, maybe shares and price as well if you did any selling along the way?) to track your cost basis now, so assuming you'd also have the dates, the computer can do it easily. -ERD50

Sure, if the tax software automatically implements it, and for that I don't have a lot of hope. Witness Turbotax's handling of US gov't obligations within MFs. As you may know, VG annually sends a table listing each fund's percentage of such income. Turbotax surely knows VG does this, yet it stubbornly refuses to allow you to enter the % so it can compute the dollar amount for you. Nope, it makes you separately calculate it by hand and feed it that $ number.

[CardsFan]

Quote:

Originally Posted by aaronc879 Looks like President Trump is planning to cut the capital gains tax by executive order. Not sure if that is even legal to do but lets assume that it is. Is this a good thing for the majority of the people or only the wealthy? I would think that many people on here would actually want to pay the tax because it gives them income to qualify for ACA. Thoughts?

Is there a link to an article about this? I have seen nothing about it.

[Aerides]

Quote:

Originally Posted by CardsFan Is there a link to an article about this? I have seen nothing about it.

Here's one I saw from the washington times
https://www.washingtontimes.com/news...al-gains-taxe/

[CardsFan]

Quote:

Originally Posted by Aerides Here's one I saw from the washington times https://www.washingtontimes.com/news...al-gains-taxe/

Thanks for the link.

So this is something some people say might happen, maybe. Wake me when there is news.

[scrabbler1]

Here is one from CNBC.


https://www.cnbc.com/2019/06/27/trum...hy-report.html