How will Capital Gains Tax hit doctors and their wallets? Sometimes current events sweep us into a blog topic, as in the case of today’s trendy Capital Gains tax increase discussion.
- On the one hand, our readers include physicians who are just beginning to think about investments, passive income, and early retirement.
- On the other hand, we have physicians and entrepreneurs in our Invent Wealth readership who have worked hard to attain a nice side business.
- For these doctors and entrepreneurs, the capital gains taxes seems poised to destroy them, just when they were seeing a little success. That’s right, the government would “reward” them by doubling their taxes. This is thanks to the proposed Capital Gains tax law.
Capital Gains Taxes and You
So if you are new to the world of finance, you might feel overwhelmed by all the talk about capital gains taxes. In this blog, we will try to break down the new administration’s proposed changes. Then, we leave it to you. You decide who these tax changes are likely to hurt.
Our big hint is that raising the capital gains tax is not just going to hurt the wealthy. Double the capital gains tax and there will be other consequences:
1. First, there will be a higher tax rate you must pay when you sell stocks and have a capital gain. Sales of other assets will likewise add to the taxes you pay.
2. Now, as we see it, the upcoming American Families Plan would blow up the capital gains tax rate to 39.6 percent from the previous 20 percent.
3. And more than that, “for residents of some states and cities that assess their own capital gains levy, Biden’s plan would push the total capital gains rate to more than 50%”, York said. “The (total) rate would rise to 56.7% in California, 58.2% in New York City and 57.3% in Portland, Oregon…”
3. In theory, the new style of capital gains tax would be aimed at Americans who make more than a million dollars.
4. Be aware. Such gains are already also taxed with an existing Medicare surcharge. Thus, with Capital Gains tax, “the federal tax rates for the wealthy could climb as high as 43.4% – bringing the levy on returns on financial assets higher than rates on ordinary income.”
Long-Term Capital Gains: What’s the Backstory?
1. Right now, taxes on long-term capital gains range from 0% to 20%.
2. The government assesses these taxes depending on a person’s income.
3. The above is basic. And then, the government adds a Medicare surcharge. At that point “federal tax rates for the wealthy could climb as high as 43.4% – bringing the levy on returns on financial assets higher than rates on ordinary income.
4. By the way, short-term capital gains on assets sold within a year are typically taxed as ordinary income.
Why Are Capital Gains Considered Favorable Taxes?
We say that capital gains are taxed favorably when we contrast them with taxes on our salaries. On the one hand, as the law currently stands, wealthy Americans pay their highest taxes on a regular income, to the tune of 37%.
On the other hand, the top rate on capital gains requires only 23.8. It’s sort of a reward for investing instead of spending the money. Our current administration sees this as unfair. By raising the capital gains tax, the tax code would no longer set lower rates on successful investments. Does anyone think that this move might discourage investing and brisk buying and selling in business?
Equalizing Income Tax Rates and Capital Gains Taxes
Therefore, we can see we are on a path to equalizing the capital gains and income tax rates for wealthy Americans. However, increasing this tax could slow down investing. There will be no favorable advantage to capital gains-type investments.
Tick Tock Capital Gains Tax Clock: When Should We Sell?
Plus, there is a question of timing. We do not yet know if the new tax style would be retroactive. However, our best guess is that it will not be.
- Therefore, if the tax is not happening until 2022, then why wait to sell off investments? Today’s tax rate provides a greater monetary return on stock sales.
- So, why wait until 2022 to sell? In 2022, you will have to pay higher taxes on stock sales. How is that going to rock the investment world?
With such questions, we can certainly see how important timing will be in our coming investment decisions. And that’s why our Invent Wealth transparent tax and investment executives are poised. We are standing by with advisory help for physicians and entrepreneurs.
Terrific Take-Aways from New Taxation
The Financial Samarai reported over the weekend that all of this tax speculation is just that. He notes that “Given this tax hike speculation, stock indices immediately dropped intraday following the news.”
Thus, we already know, “Therefore, even if you aren’t one of the estimated 0.35% of Americans who make over $1 million a year, there is a chance you may be negatively affected by this tax hike.” We need to let that idea sink in as we plan our monthly budgets and note the price of everyday goods like diapers and gas. Capital gains taxes could be one of many factors that could influence how fast wages rise and how slowly the economy recovers.
- Despite some proof that “there is no apparent relationship between changes in capital gains tax rates and market returns,” we are seeing a “trickle-down” effect.
- However, as the Financial Samurai attests, “there is a downward sloping line indicating lower S&P 500 returns and higher capital gains tax rates.”
The Continuing Capital Gains 2021 Story
It is not an illogical assumption to think that these changes in capital gains taxes could contribute to a lower, slower economy. The capital gains tax will then hit every level of consumer, not just the wealthy.
Therefore, “even if you aren’t one of the estimated 0.35% of Americans who make over $1 million a year, there is a very good chance you may be negatively affected by this proposed capital gains tax hike.”–even if you are a doctor.
Remember, as you hear all the capital gains tax stories, the tax hike is not yet law. We’ll keep you informed, as always, while we help you invent wealth.