In Kansas you’ll often hear – “If you don’t like the weather, wait a minute.” Long-Term Capital Gains tax rates have historically been a bit like the shifting Kansas winds. The current proposal has a long way to go before its final, but it’s bringing this tax to the forefront of conversation.
Here is a bit of vocab so that you can sound smart when this comes up over dinner:
- Capital Gains are the difference between the amount you paid for an investment and the amount the investment is worth when you sell it.
- Long-Term means that you held that investment for over 1 year.
- The tax applies when trading taxable accounts meaning that it doesn’t impact retirement accounts like IRAs or 401(k)s.
- It’s a tax on realized gain so it only applies when you sell the investment.
- The rate on the chart above is the top nominal rate which is the top rate paid on the last dollar. The proposed 43.4% would be assessed on taxpayers with greater than $1 million in taxable income. For those under that threshold, the top rate remains 23.8%.
- The current proposal is retroactive. The timing is a bit vague, but, for now, there isn’t an incentive to run out and sell now to avoid higher taxes later.
I’m not going to lie; this proposed rate changes the equation on taxable investments. This tax is currently 100% avoidable by holding onto the asset. There are several factors that go into a sell decision, of which tax impact is one; the higher the tax rate, the less likely it is that selling is a good idea.
“If you don’t like the weather, wait a minute” isn’t a flippant statement. In Louisiana, as it was in Kansas, the weather is a life changing force. The statement is more pragmatic. We can no more control the weather than we can the tax legislation. We will deal with what comes and then we will wait for whatever comes after that. Even if it’s not right now, as this chart illustrates, it’s reasonable to hope that the tax winds shift favorably sometime in the future.
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