Agree on Capital Gains Tax Plan
What Does This Mean?
Well, it looks like the Republican budget negotiators and
the Democrats, led by the White House, have finally agreed on a capital gains
tax plan. Although the accord does not index capital gains taxes to inflation,
it does result in significant tax savings for any American who owns a house,
stocks, or mutual funds.
According to the newswires, long-term capital gains taxes will now be taxed
at a markedly lower rate than the prevailing 28%. If you hold something from
one to five years, your capital gains tax rate will now be 20%. If you hold
something for more than five years, you will now benefit from a "super" long-term
of 18%. Assets held for one year or less would be taxed at the taxpayer's
"normal" tax rate. If this is the case, the legislation would create a "super
long-term" holding period for assets held more than five years. Additionally,
those in the 15% income tax bracket will now only pay 10% on long-term capital
gains. Although this may not seem like a big deal, as few in the 15% income
tax bracket have significant stock portfolios, many do own homes.
Although many high-income individuals will benefit from these tax cuts, investors
should recognize these capital gains cuts will actually help middle-class
investors as well. The current long-term capital gain rules allow assets
held for more than one year to be taxed at a taxpayer's normal rate, or 28%,
whichever is less. Therefore, for many individuals whose "normal" tax rate
was 28% or less, there was very little "tax" difference between short- and
long-term gains. Until now, the only people who truly received tax relief
for holding long term were those who were in the 33% and higher income tax
brackets. If this negotiated plan actually makes it into law, the impact
to the average investor in the 28% tax bracket or below could be significant.
So...what will this mean to you, assuming these proposals make it into law?
If you were to realize a $50,000 gain on the sale of stock held over a five-year
period, your tax liability on that gain (under the new provisions) would
total $9,000 compared to $14,000 under the old rates. That's a $5,000 tax
savings. Even if you held the shares more than one year but less than five
years, your tax would be only 20% of the gain, or $10,000. This still represents
a $4,000 tax savings. If your normal income tax rate was only 15% and you
were to recognize a $50,000 gain, you will be taxed only $5,000 instead of
the $7,500 you would have had to pay under the old legislation.
On a $50,000 taxable gain: BEFORE AFTER
Income tax 28%+, held 5 years+ $14,000 $9,000
Income tax 28%+, held 1-5 years $14,000 $10,000
Income tax 15% $7,500 $5,000
As you can see, this deal represents real tax savings for investors in all
tax brackets -- not just for those in tax brackets above 28%. Although many
commentators may paint this tax reform as more savings for the rich, it really
puts more money into the pockets of anyone who owns stock, mutual funds,
or a house, unlike the current capital gains tax law. Investors should be
excited about this development.