Capital gains and capital components in property tax proposals

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Although scant attention, the proposed capital gains tax change is good news for high-income Americans and bad news for those with incomes between $ 400,000 and $ 1 million.

Good news for top earners: The Houseways and Means Commission did not adopt the Biden administration’s proposal to increase the maximum long-term capital gains for people with incomes of $ 1 million or more at 43.4%. This should have been well above the current maximum tax rate of 23.8%. It consists of a 20% tax rate and an additional 3.8% tax for many. (Long-term profit is the profit from the sale of assets held for a year or more.)

Instead, the House of Representatives tax authorities proposed to raise the tax rate from 20% to 25%, keep the property tax at 3.8%, and raise it to 28.8%. They also added an additional 3% tax to people with incomes of $ 5 million or more, which does not affect most Americans.

But there is a problem here. The proposed tax rate of 28.8% starts with taxable income of $ 400,000 for single filers and $ 450,000 for married co-filers. This is about $ 50,000 below the current maximum threshold of 23.8% of $ 445,851 for single filers and $ 501,601 for married co-filers.

This is bad news for people with incomes between $ 400,000 and $ 1 million, even from a temporary downturn, such as selling a home or business.

For many small business sellers, a portion of their profits is between 15% and 28.8%, according to Matt Fortz, director of BDF, a Chicago-area wealth consulting firm that works with small business owners. companies. Will amount to. Homeowners operating in-house generally do not have to pay an additional 3.8% tax on the profits from the sale, but from next year another provision of the house bill may apply. .

It is a complex area. However, Fortz said owners with approximately $ 150,000 in annual taxable income from the activity of selling businesses for $ 1 million in capital gains will receive $ 245,000 in capital gains and surcharges. under the Ways and Means Bill. I guess you have to pay. It is against $ 182,000 under the current law.

Greg Will, planner for Bestgate Wealth Advisors, Md., Said these owners often have low retirement savings as they reinvest their profits back into the business.

“Capital gains tax increases for the ultra-rich can have a significant impact on the retirement of middle-class business owners,” he says.

The proposed tax hike could also raise taxes for long-term home sellers in expensive areas such as Boston, New York and San Francisco. If the profit exceeds $ 250,000 for a single tax filer of a door-to-door seller, $ 500,000 for a married co-filer and the seller’s total taxable income exceeds the threshold of $ 400,000 / $ 450,000. It’s going to start.

Charlie Opler, a longtime Ridgewood, New Jersey-based broker and current president of the American Real Estate Agents Association, said many clients of his business were making well under $ 400,000 and selling homes. States that the benefits are much greater than the exemptions.

“I was surprised that the bill for method and resources was well below the president’s limit of $ 1 million,” he said. “This will be particularly damaging for widows and widows who are only entitled to an exemption of $ 250,000.”

Changes in tax law will take effect for transactions after September 13, the date the proposal was made, unless the seller has previously entered into a binding contract. (There are often such cuts with changes in capital gains to prevent gambling.)

What can affected taxpayers do other than talk to lawmakers and industry groups? The options to consider are:

to follow

Neither the plenary chamber nor the Senate act according to the rules of method and means. There may still be major changes.

For example, lawmakers can help home sellers by increasing the proposed threshold. The $ 250,000 / $ 500,000 exemption, which was enacted in 1997 and is not an indicator of inflation, is unlikely to be extended. House tax officials appeared to have made a government proposal to tax capital gains on death, so that they could even abandon their proposed methods and means.

Bet the good news

While unlikely, lawmakers may postpone the September 13 effective date. Sellers who act before the new deadline may be subject to the previous rates.

For example, President Biden’s April proposal states that sellers with revenues of $ 1 million or more will face a maximum rate of 43.4% since the date of introduction. However, sales before September 13 are currently subject to the peak rate of 23.8%, so some people have made sales since then.

Prepare to handle big profits

If Congress lowers the capital gains threshold, consider distributing the gain to avoid higher brackets.

Megbertert, an advisor to Flow Financial Planning near Seattle and with many clients in the tech industry, says he owns a stake in the company, although his annual income is often less than $ 400,000. .. The $ 1 million capital gains threshold does not complicate planning in most cases, but the $ 400,000 threshold does.

These investors may want to make a profit this year if they help to drop below the $ 400,000 or $ 450,000 threshold in the future.

Share your thoughts

How are you prepared for any changes to the 2021 tax bill? Join the conversation below.

“If we don’t increase the tax rate this year and save them from the tax rate hike next year, there may be nothing wrong with accelerating the planned sales.” , she says.

Home sellers cannot diversify their profits, but they can avoid getting other profits in the year of the sale. They can also investigate any dollars spent on home improvement. These costs can reduce taxable profits by increasing the basic price of housing.

Charitable investors with high temporary profits may want to set up a few years of deductions to reduce their taxable income, perhaps with a donor-advised fund.

Keep perspective

Taxes affect return on investment, but that’s only one factor. “Investment treaties, not taxes, should drive sales,” said Jody King, director of asset planning for Boston Trust Trusts.

Or as the saying goes, “Don’t let the taxtail swing your dog.” “

Write to Laura Sanders ([email protected])

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