During most election cycles, some of the major campaign issues revolve around changing tax laws. One of the tax reforms frequently discussed is rescinding the capital gains tax. Let’s start by first explaining what capital gains are and how they affect investors. Capital gains come into play after an investor sells a taxable asset. If an asset is held for a year or less, this is considered a short-term capital gain. If an asset is held for more than 365 days, this would be considered a long-term capital gain.
Short-term capital gains receive ordinary income tax treatment while long-term capital gains receive a favorable tax rate. Rescinding the capital gains tax law would mean long-term taxable investments no longer receive preferable tax rates. The table below outlines the long term capital gains tax rate that would apply to an investor based on their ordinary income tax.
According to the current tax laws, if the investor is single and earns between $40,001 – $441,450 annually, a 15% tax rate would apply to a long term capital gain. However, without the capital gains tax law, this same person would pay between 22-32% in taxes on this same investment. The table below shows an example of the amount of taxes that would be paid on various capital gains.
Rescinding the capital gains tax would be devastating for an investor’s overall return on investment, particularly if the recapture of depreciation tax is also calculated. As financial planners, our role is to understand our clients’ values and provide the clarity needed to obtain the necessary goals to create their vision of the future. For many clients, this includes a lifetime of savings diligently invested with intent to live a comfortable life during retirement. The rescinding of the capital gains tax could mean a complete change to an investor’s lifestyle. If you would like more information on how the proposed tax law changes would affect your financial future, please do not hesitate to contact a member of our team.
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The Twin Rivers team wants to guide you on your journey to financial success. If you have any questions about the topics above or would like to discuss any financial decision you are facing, please do not hesitate to contact our team.