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]

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]

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]

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]

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]

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]

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:

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/Wealt...ates#U.S._stock_market_ownership_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]

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]

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.

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]

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]

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]

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/2019/jun/30/donald-trump-considering-cut-to-capital-gains-taxe/

 

[CardsFan]

Here's one I saw from the washington times
https://www.washingtontimes.com/news/2019/jun/30/donald-trump-considering-cut-to-capital-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/tru...-cut-capital-gains-tax-on-wealthy-report.html

 

[Independent]

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.

Yep.

And, if we're going to index capital gains, why not index the interest on CDs? If I earn 2.5% on my CD when the CPI goes up by 2%, why shouldn't I pay tax on just the 0.5%?

And, bonds. Regular bonds bought at par, bonds resold at a discount or premium, amortizing bonds, and convertible bonds that have been converted. We need rules for all of them.

And, what about real estate that has been depreciated for years, but is now sold at a profit, or that has maintenance or improvements.

But, for me, this is a tax cut where almost alll the dollars go to the wealthiest Americans. I don't see why we should increase the deficit to do that.

 

[CardsFan]

Here is one from CNBC.


https://www.cnbc.com/2019/06/27/tru...-cut-capital-gains-tax-on-wealthy-report.html

Thanks again, but my comment remains.

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

 

[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.

Yes, it bugs me too that I have to make a manual calculation for that, after I paid for this software to do my taxes for me. Not the end of the world, but it does bug me.

But I think the capital gains thing would be big enough that they would have to support it (and charge accordingly).

Yep.

And, if we're going to index capital gains, why not index the interest on CDs? If I earn 2.5% on my CD when the CPI goes up by 2%, why shouldn't I pay tax on just the 0.5%? ...

Fine by me, I like consistency in the rules.

But be aware, for most people this would not be such a big deal for CDs overall. You have that rate compared to inflation for the year, versus a capital gain over many years. I suppose if you were in CDs for 10 years, it kinda comes out the same, though cap gains are expected to be higher than CD rates, so more impact on cap gains.

.. And, bonds. Regular bonds bought at par, bonds resold at a discount or premium, amortizing bonds, and convertible bonds that have been converted. We need rules for all of them. ...

Wouldn't that be accounted for? If I sell a bond at a gain or loss, that is a capital gain, same as a stock. Am I missing something?

...

And, what about real estate that has been depreciated for years, but is now sold at a profit, or that has maintenance or improvements. ...

Same as above?

... But, for me, this is a tax cut where almost alll the dollars go to the wealthiest Americans. I don't see why we should increase the deficit to do that.

I don't look at any law or tax ruling in terms of benefiting/hurting the poor/rich. I look at it as is it a reasonable and consistent approach to collecting this tax. We shouldn't be able to be unfair to a group, just because they are a minority, whether that minority is rich or poor. I don't think things should be justified because they only affect a few people. Right is right, wrong is wrong.

And as I see it, telling a person they need to pay the same tax on a $1,000 'gain' regardless of whether that gain was realized in 13 months or 30 years, is not fair and not consistent.

I agree on not increasing the deficit, but we should still be fair.

-ERD50

 

[GravitySucks]

I think it's terrible that my capital is taxed at a lower rate than someone's labor.
Since the wealthy run things here I imagine Congress could get this through.

 

[pb4uski]

.... 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.

I agree, the goal should be to make taxes simpler, NOT more complicated and to index capital assets adds a lot of complexity to taxes.

Besides, I'm struggling with a comparison with bonds... would that mean that the inflation component of interest income would not be taxed? Or alternatively, if I buy a bond at par, collect interest (even if interest is fully taxed) and then sell or get the value of par at maturity, then do I have a big loss because of the impact of inflation on the par/maturity value?

Another half-baked idea... especially to think that it could be done via executive action... Tillerson was right.

Why should inflation on a capital asset be tax free but the portion of bond interest that is paid to compensate the holder for inflation be taxable? It doesn't make sense... remember the basics of constructions of rates of return... it begins with inflation with additions for credit risk, liquidity, market risk, etc. ... inflation is the primary element of all rates of return.