New Tax Problems For Wall Street

In the coming days, the second phase of the American Family Plan is slated to roll out for economic recovery which will cost over 1.9 trillion dollars. The challenges that some could face if these laws are implemented, are on the horizon.

The proposal for this new economic agenda is expected to be outlined on April 28th. This is anticipated to raise 370 billion over 10 years. Studies of past tax hikes show that markets do not generally rise, or fall based solely on a capital gain hike but doubling the tax could result in frantic selling (which is what happened on Friday).

The increase in long-term capital gains tax rate applies to single taxpayers with more than $445,850 of income this year and $501,600 for married couples who file jointly. The rate would increase from 23.8% (20% including the 3.8 surtax) to 43.7% (39.6% plus the 3.8% surtax).

The top 0.3% of taxpayers make 1 million or more. This includes ½ million tax filers. Of the ½ million tax filers, they get more than half of income from capital gains income and this could easily be shifted, in essence causing a drop of billions, if these assets are sold prior to the laws taking place.

Half a million taxpayers are affected, and of these, ½ are in the highest taxed states including NJ, CT, NY, and CA. The combined rates in these states are reflected below:

Combined state and federal taxes:

California 56.7%
New Jersey 54.1%
New York City 58.2%

Many questions arise as far as the classification of millionaires. Many millionaire income reporters are one-time earners – people who get a one-time sale of a business they spent their entire life building. Many are not recurring income earners and are one-time millionaires in that specific year. The diversity of the type of high-income earners can be broken down, but per the president’s plan, these would be grouped into the same class of a one-time millionaire taxpayer subject to over 50% tax on a one-time sale.

What is Capital Gains tax?

Short term capital gains (held less than one year) are already taxed at the rate of ordinary income. Currently capital gains held over 1 year are subject to 20% plus a surtax on capital gains of 3.8% implemented during the Affordable Care Act for individuals making 200k as a single individual and 250k as joint filers. This would increase from 23.8 % to 43.7% before state taxes for those making 1 million or more. This would be the first time in history that the capital gains tax would surpass the ordinary income tax. However, capital gains could easily be shifted.

Current long-term rates:

0%: 0-80,000
15%: 80,001-496,600
20%: 496,601+

Written by Lindsay Ott

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