In the United States, individuals and companies pay US federal income taxes on net totals of all their capital gains. The tax rate depends on the investor's tax bracket and the amount of investment time is held. Short-term capital gains are taxed at the investor's usual income tax rate and are defined as investments held for a year or less before sale. Long-term capital gains , on the disposition of assets held for more than one year, are taxed at a lower rate.
Video Capital gains tax in the United States
Current law
The United States collects short-term capital gains at the same rate as regular income taxes. Long-term capital gains are taxed at a lower rate as shown in the table below. (Qualified Dividends receive the same preferences.)
Separately, taxes on certain collection and stock items are limited to 28%. Tax on Section 1250 non-recoverable profits - part of the profits on deprecated real estate (structures used for business purposes) that have or can be claimed as depreciation - are limited to 25%.
The amount of revenue ("tax brackets") is reset by the Tax Cuts and Jobs Act of 2017 for fiscal year 2018 to be equal to the amount that should be due under the previous law. They will be adjusted every year based on the size of CPI Chained inflation. The amount of this income after deducting: There is another group, the revenue below which is shown as $ 0 in the table, where no taxes have to be paid. For 2018, this amount is at least a standard deduction, $ 12,000 for individual returns and $ 24,000 for joint returns, or more if the taxpayer has more than the amount of deductible goods (itemized item).
Additional taxes
There may be a tax in addition to the tax rate shown in the above table.
- Taxpayers earn above a certain limit ($ 200,000 for singles and heads of households, $ 250,000 for married couples applying widowers together and qualifying with dependent children, and $ 125,000 for married couples who apply separately) pay an additional tax of 3.8% for all investment income. Therefore, the top federal tax rate on long-term capital gain is 23.8%.
- State and local taxes often apply to capital gains. In circumstances where the tax is expressed as a percentage of the federal tax liability, the percentage is easy to calculate. Some countries structure their taxes differently. In this case, long-term and short-term benefits are not always compatible with federal care.
Capital gains do not encourage ordinary income into higher income groups. Capital Gains and Qualified Dividend Worksheet in Instruction Form 1040 sets out a calculation that treats long-term capital gains and qualified dividends as if they were the last received income, then applies the preferential tax rate as shown in the table above.
Cost base
The capital gains taxed are excess of the selling price on the basis of asset costs. The taxpayer reduces the selling price and increases the cost base (reduces the capital gains taxed) to reflect transaction costs such as broker fees, certain legal fees, and sales taxes on sales.
Depreciation
Conversely, when a business is entitled to a reduction in depreciation on an asset used in business (such as for clothing each year on a piece of machine), it reduces the cost base of the asset by that amount, potentially to zero. A reduction in the basis of whether the business claims depreciation or not.
If the business then sells the asset for profit (that is, for more than the customized cost base), part of this profit is called depreciation depreciation. When selling a particular real estate, it may be treated as a capital gain. When selling equipment, however, repurchase is generally taxed as ordinary income, not a capital gain. Furthermore, when selling several types of assets, none of those profits qualifies as a capital gain.
Other benefits in business travel
If a business develops and sells property, profits are taxed as business income rather than investment income. The Fifth Circuit Court of Appeals, in Byram v. United States (1983), sets out the criteria for making this decision and determines whether earnings qualify for treatment as a capital gain.
Inherited property
Under an improved basic rule, for an individual who inherits a capital asset, the cost base is "upgraded" to the fair market value of the property at the time of inheritance. When it is finally sold, capital gains or losses are just the difference in value from the bottom of this increase. An increase in the value that occurs before inheritance (as during the life of the deceased) is never taxed.
Capital loss
If a taxpayer realizes both capital gains and capital losses in the same year, losses offset (cancel) the gain. The amount remaining after the offset is the net profit or net loss used in the calculation of taxable income.
For individuals, a net loss can be claimed as a tax deduction on ordinary income, up to $ 3,000 per year ($ 1,500 in case of married individual appointments separately). The remaining net losses can be carried over and applied to profits in the coming years. However, losses from the sale of private property, including residence, are not eligible for this treatment.
Corporations with net losses of any size may file back their tax forms for the previous three years and use the loss to offset the reported profits in those years. This results in a tax return on previously paid capital gains. After carryback, the company can carry an unused portion of forward losses for five years to compensate for future profits.
Payback
Corporations may state that payments to shareholders are a return on capital rather than dividends. Dividends may be taxed in the year in which they are paid, while returning working capital by lowering the cost base by the amount of payments, thereby increasing the acquisition of the shareholder's final capital. Although most qualified dividends receive equally favorable tax treatment with long-term capital gains, shareholders may delay unlimited payback of returns by refusing to sell shares.
Maps Capital gains tax in the United States
History
From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7%. The Revenue Act of 1921 allows a 12.5% ​​profit tax rate for assets held for at least two years. From 1934 to 1941, taxpayers could exclude from taxation up to 70% of profits on 1, 2, 5, and 10 year assets. Beginning in 1942, taxpayers may exclude 50% of the capital gains on assets held for at least six months or opt for an alternative tax rate of 25% if their usual tax rate exceeds 50%. From 1954 to 1967, the maximum rate of capital gains tax was 25%. The rate of capital gains tax increased significantly in the Tax Reform Act of 1969 and 1976. In 1978, Congress eliminated the minimum tax on excluded profits and increased the exception to 60%, reducing the maximum rate to 28%. The reduction in tax rates in 1981 further reduced the rate of capital gains to a maximum of 20%.
The 1986 Tax Reform Act lifted the exclusion of long-term benefits, raising the maximum rate to 28% (33% for taxpayers subject to temporary suspension). Budget actions of 1990 and 1993 increased the usual tax rate but reasserted a 28% lower rate for long-term profits, although the effective tax rate sometimes exceeded 28% due to other tax provisions. The 1997 Taxpayers Aid Act reduced the capital gains tax rate to 10% and 20% and created exceptions for one's primary residence. The 2001 Economic Growth and Reconciliation Tax Act relieved it further, to 8% and 18%, for assets held for five years or more. Employment and Tax Benefit Reconciliation Act of 2003 reduced tariffs by 5% and 15%, and extended the preferential treatment of quality dividends.
The 15% tax rate is extended to 2010 as a result of the 2005 Income Tax Prevention and Reconciliation Act, then to 2012. The 2012 US Taxpayer Assistance Act makes qualifying dividends a permanent part of the tax code but adds a 20% about earnings in the new and highest tax bracket.
The 2008 Emergency Economic Stabilization Law caused the IRS to introduce Form 8949, and radically altered the Form 1099-B, so the broker would report not only the amount of proceeds but the purchase to the IRS, allowing the IRS to verify reported capital gains.
The Small Business Jobs Act of 2010 excludes taxes on capital gains for angels and venture capital investors on small business share investments if held for 5 years. It was a temporary measure but extended to 2011 by Tax Relief, Reauthorization of Unemployment Insurance, and the Employment Creation Act of 2010 as a work stimulus.
In 2013, the provisions of the Patient Protection and the "Obama-care" Act apply which impose a Medicare tax of 3.8% (previously wage tax) on capital gains from high-income taxpayers.
Summary of recent history
From 1998 to 2017, the tax law included tax rates for long-term capital gains to taxpayer tax groups for ordinary income, and set lower rates for capital gains. (Short-term capital gains have been taxed at the same rate as regular income for this entire period.) This approach was imposed by the Withholding Tax and Jobs Act of 2017, beginning with the fiscal year 2018.
* This rate is deducted by half percentage points for 2001 and half percentage points for 2002 and beyond ** There is a two percentage point deduction for capital gains from certain assets held for more than five years, yielding a rate of 8% and 18%.
*** Gains can also be taxed Medicare 3.8%.
Rationale
Who pays it
Capital gains taxes are disproportionately paid by high-income households, as they are more likely to have assets that generate taxable profits. While this supports the argument that capital gains taxpayers have more "ability to pay," it also means that payers are perfectly capable of delaying or avoiding taxes, because it only comes because if and when the owner sells the assets. A disproportionate incident in high-income households means that much of the debate on tax rates is partisan. Republicans like lower rates, while Democrats prefer higher rates.
Although tax incidents are on high-income taxpayers, low-income taxpayers who do not file a capital gains tax may pay them through a price change because actual payers pass the cost of paying taxes. Another factor that complicates the use of capital gains taxes to overcome income inequality is that capital gains are usually not repeat revenues. A taxpayer may be "high income" in a year in which he or she sells assets or inventions.
Existence of tax
The existence of a controversial capital gain tax on a partisan basis. In 1995, to support the Contract with the American legislative program of House Speaker Newt Gingrich, Stephen Moore and John Silvia wrote a study for the Cato Institute. In the study, they proposed a halve reduction of the capital gains tax, arguing that the move would "substantially increase tax collection and increase tax payments by the rich" and that it would boost economic growth and job creation. They wrote that the tax "is so economically inefficient... that the optimal economic policy... will wipe out the tax completely." More recently, Moore has written that capital gains tax is a double taxation. "First, most of the capital gains come from the sale of financial assets such as stocks, but publicly owned companies must pay corporate income tax.... Capital gains are the second tax on that income when shares are sold."
Richard Epstein said that the capital-gain tax "slows the shift of wealth from less to more productive use" by imposing costs on decisions to shift assets. He supports revocation or renewal provisions to defer taxes on reinvested profits.
Preference level
The fact that the rate of long-term capital gains is lower than the level of ordinary income is considered by the political left, such as Senator Bernie Sanders, as a "tax break" that asks investors to pay their "fair share". Tax benefits for long-term capital gains are sometimes referred to as "tax expenses" that governments can choose to stop spending. On the contrary, Republicans favor the decline in the rate of capital gains tax as an incentive for saving and investment. Also, the lower rates partially compensate for the fact that some capital gains are illusory and reflect nothing but inflation between the time the asset is bought and the time of sale. Moore writes, "when inflation is high.... tax rates can even rise above 100 percent", as when a taxpayer owes taxes on capital gains that do not result in an increase in real wealth.
Holding period
The one-year threshold between short-term and long-term capital gains is arbitrary and has changed over time. Short-term gains are underestimated as speculation and perceived as self-interest, nearsightedness, and unstable, while long-term gains are characterized as investments, which should reflect a more stable commitment existing in the nation's interest. Others call it a false dichotomy. The holding period to qualify for favorable tax treatment varies from six months to ten years (see History above). There is special treatment for assets held for five years during the George W. Bush Presidency. In his 2016 Presidential campaign, Hillary Clinton advocated holding a period of up to six years with the scale of tax rates shifting.
Interest interest
The interest carried is part of any profit earned by the general partner of private equity funds as compensation, although it does not contribute any initial funding. Managers can also receive compensation which is a percentage of assets managed. The tax law provides that when the manager takes, as a cost, a portion of the realized gain in respect of the investment they manage, the manager's profits are given the same tax treatment as the client's profit. Thus, where the client realizes long-term capital gains, managers' profits are a long-term capital gain - generally resulting in lower tax rates for managers than would happen if the manager's earnings were not treated as a term capital gain. Under this treatment, the tax on long-term benefits does not depend on how investors and managers share profits.
This tax treatment is often called the "hedge-fund gap", even though it is a private equity fund that benefits from care; hedge funds usually do not have long-term benefits. It has been criticized as "untenable" and "gross inequality", therefore tax management services at a preferential rate are intended for long-term benefits. Warren Buffett has used the term "pamper the super rich". One argument is that a preferential rate is guaranteed because the grant from the carrying interest is often suspended and contingent, making it less reliable than regular pay.
The 2017 tax reform establishes a three-year holding period for these fund managers to qualify for long-term capital-gain preferences.
Effects
Capital gains taxes make money for the government but punish investments (by reducing the final rate of return). The proposal to change the tax rate of the current rate is accompanied by a prediction of how it will affect both outcomes. For example, an increase in tax rates would be more disincentive to invest in assets, but would seem to generate more money for the government. However, the Laffer curve suggests that increased revenues may not be linear and may even decrease, as Laffer's "economic effects" begin to exceed "arithmetic effects." For example, a 10% tariff increase (like from 20% to 22%) might increase less than 10% of additional tax revenue by blocking some transactions. Laffer postulates that 100% tax returns do not generate tax revenues.
Another economic effect that might make a receipt different from that predicted is that the United States is competing for capital with other countries. Changes in the rate of capital gain can attract more foreign investment, or encourage US investors to invest overseas.
Congress sometimes directs the Congressional Budget Office (CBO) to estimate the effect of a bill to change the tax code. It is debatable on partisan grounds whether to direct CBOs to use dynamic assessments (to include economic effects), or static scores that do not consider the effect of the bill on taxpayer incentives. Having failed to enact the Budget and Accounting Transparency Act of 2014, the Republic mandated a dynamic scoring of rule changes in early 2015, to be implemented in Fiscal Year 2016 and subsequent budgets.
Measuring effects on the economy
Proponents of capital gains tax rate cuts may argue that the current rate is on the down side of the Laffer curve (past the reduced return point) - that it is so high that the disincentive effect is dominant, and thus the cut rate will "pay for itself." Opponents of capital-gains tax rate cuts argue the correlation between the highest tax rates and total economic growth can not be inferred.
Mark LaRochelle writes on the conservative website Human Events that cuts the rate of capital gains to increase jobs. He presented the US Treasury chart to assert that "in general, the capital gains tax and GDP have an inverse relationship: when rates rise, the economy goes down". He also cited statistical correlations based on changes in tax rates during George W. Bush's presidency, Bill Clinton, and Ronald Reagan.
However, comparing the rate of capital gains tax and economic growth in America from 1950 to 2011, Brookings Institution economist Leonard Burman found "no statistically significant correlation between the two", even after using a "five-year lag." Burman data is shown in the graph on the right.
Economist Thomas L. Hungerford of the Liberal Economic Policy Institute found a "little or even negative" correlation between the reduction of capital gains tax and savings and investment rates, writes: "Savings interest rates have fallen over the last 30 years while the rate of capital gains tax has fallen from 28 % in 1987 to 15% today.... This shows that changing the rate of capital gains tax has little effect on personal savings ". Hungerford also studied the upper marginal tax rate from 1945 to 2010 and also found no correlation with savings, investment, and productivity growth.
Factors that make measurement difficult
Researchers typically use the upper marginal tax rate to characterize policies as high taxes or low taxes. This figure measures the disincentive in the largest transactions per additional dollar of taxable income. However, this may not tell the full story. The last Summary history table shows that, although the marginal rate is now higher than ever since 1998, there is also a large group where the tax rate is 0%.
Another reason is that it is difficult to prove the correlation between the rate of primary capital gain and total economic output is that changes in the rate of capital gain do not occur separately, but as part of the tax reform package. They may be accompanied by other measures to increase investment, and Congress's consensus to do so may stem from economic shocks, from which the economy may have recovered independently of tax reforms. The package of reforms may include increases and decreases in tax rates; The 1986 Tax Reform Act increased the rate of primary capital gain, from 20% to 28%, as a compromise to reduce the rate of ordinary income from 50% to 28%.
Tax avoidance strategy
Strategic loss
The ability to use capital losses to offset capital gains in the same year is discussed above. Toward the end of the tax year, some investors sell assets of less value than investors who pay them to obtain these tax benefits.
A washing sale, in which the investor sells the asset and purchases (or similar assets) immediately returns, can not be regarded as a loss at all, although there are other potential tax benefits as entertainers.
In January, the new tax year begins; if stock prices rise, analysts can attribute that increase in the absence of the year-end sale and say there is a January effect. The Santa Claus Rally is a stock price hike at the end of the year, presumably to anticipate the January effect.
Versus purchase
A taxpayer may point out that the sale of a company's stock corresponds to a specified purchase. For example, a taxpayer holding 500 shares may have bought 100 shares of stock each on five occasions, possibly at different prices each time. Individuals many of 100 shares are usually not separated; even on days of physical stock certificates, there was no indication of which stocks were bought at the time. If the taxpayer sells 100 shares of stock, then by determining which of the five lots are sold, the taxpayer will be aware of one of five different gains or capital losses. Taxpayers can maximize or minimize profits depending on the overall strategy, such as generating a loss to offset profits, or keeping the total within the range taxed at a lower or no level at all.
To use this strategy, the taxpayer must specify at the time of sale being sold (creating a "contemporary record"). This "versus purchase" sale versus (against) certain purchases. On the brokerage website, "Lot Selector" can let the taxpayer determine the purchase in accordance with the sell order.
Primary residence
Section 121 allows one to exclude from gross income up to $ 250,000 ($ 500,000 for married couples filing jointly) from gains on the sale of real property if the owner is owned and uses it as a primary residence for two of the five years prior to the date of sale. Two years of residency does not have to be sustainable. A person can fulfill ownership and use tests over a different 2 year period. A taxpayer can move and claim a major residence exception every two years if lived in an area where house prices rise rapidly.
The test may be revoked for military service, disability, partial residence, unexpected events, and other reasons. Moving to shorten one's journey to a new job is not an unexpected event. The bankruptcy of an employer encouraging moving to a different city is likely to be an unexpected event, but an exception would be judged higher if a person stayed home for less than two years.
The number of these exceptions does not increase for home ownership beyond five years. One can not reduce the loss on the sale of one's home.
Exceptions are also assessed if there is a part of the ownership period in which the house is not the primary residence of the taxpayer, spouse, or ex-spouse.
Suspension strategy
Taxpayers may suspend capital gains taxes to the forthcoming tax year using the following strategies:
- Section 1031 exchange - If a business sells property but uses proceeds to purchase similar properties, it can be treated as a "similar" exchange. Taxes are not due by sale; instead, the cost basis of the original property is applied to the new property. A business can not avoid a capital gain tax, but it can delay them indefinitely with this technique Although 1031 treatments are not available for personal real estate, taxpayers may stay on property. For example, a homeowner can move from a primary residence, rent it for a while, exchange it for a new house, rent out the house for a while, and then move there.
- Structured sales, such as self-directed installment sales, are sales that use third parties, in an annuity style. They allow sellers to defer recognition of profits on the sale of business or real estate to the tax year in which the proceeds are received. Costs and complications should be weighed against tax savings.
- The charity trust, which is prepared to transfer assets to a charity after death or after a period of years, usually avoids the capital gains tax on asset appreciation, while allowing the original owner to temporarily benefit from the asset.
Proposal
Simpson-Bowles
In 2011, President Barack Obama signed Executive Order 13531 to establish a National Commission on Fiscal Responsibility and Reform ("Simpson-Bowles Commission") to identify "policies to improve the fiscal situation in the medium term and to achieve long-term fiscal sustainability." The Commission's final report takes a similar approach to the 1986 reform: abolishing preferential tax rates for long-term capital gains in return for lower interest rates on ordinary income.
The proposal was not enforced. Republicans want Obama to raise his Democratic counterparts on fiscal policy; 2012 presidential candidate Mitt Romney blames Obama for "missing the bus" in his own commission. Obama denied that his own tax plan "made some adjustments to" Simpson-Bowles and "before Congress," but Politifact wrote that "we do not expect a GOP-led Congress to pursue it."
In a 2016 campaign
The tax policy is part of the 2016 presidential campaign, as candidates propose changes to the tax code affecting the capital gains tax.
President Donald Trump's main proposed amendment to the capital gains tax is to revoke the 3.8% Medicare surtax that came into effect in 2013. He also proposed to revoke the Alternative Minimum Tax, which would reduce tax liabilities for taxpayers with large revenues including capital gains. The maximum tax rate of 15% for businesses can result in lower capital gain taxes. However, as well as lowering the tax rate on regular income, it will lower the dollar amount for the remaining tax brackets, which will result in more individual capital gains over (20%) tax rate. Other Republican candidates propose to lower the capital gain tax (Ted Cruz proposes a 10% rate), or completely eliminate it (such as Marco Rubio).
Democratic candidate Hillary Clinton proposes to increase the rate of capital gains tax for high-income taxpayers by "creating some new higher tariffs," and proposing a sliding scale for long-term capital gains, based on the time the asset is held, up by 6 years. Profits on assets held from one to two years will be short-term reclassified and taxed as ordinary income, at an effective rate of up to 43.4%, and long-term assets not held for 6 full years will also be taxed at a higher rate. rate. Clinton also proposes to treat the borrowed interest (see above) as ordinary income, increase taxes, to impose a tax on "high-frequency" trades, and to take other measures. Bernie Sanders proposes to treat a lot of capital gains as regular income, and increase Medicare surtax to 6%, yielding a 60% effective rate on some capital gains.
At the 115th Congress
The Republican Party introduced the American Health Care Act (House Bill 1628), which would change the Patient Protection and Affordable Care Act ("ACA" or "Obamacare") to withdraw 3.8% tax on all investment income for the income taxpayer high and 2.5% "joint responsibility payments" ("individual mandates") for taxpayers who do not have acceptable insurance policies applicable to capital gains. The House of Representatives endorsed the bill but the Senate did not.
- 2017 tax reform
House Bill 1 (Tax Cuts and Jobs Act of 2017) was released on 2 November 2017 by Chairman Kevin Brady of the House Ways and Means Committee. The treatment of capital gain is proportional to current law, but that's roughly double the standard reduction, while dropping personal exclusions in favor of larger child tax credits. The tax brackets are constantly adjusted for inflation, but use a lower CPI as a measure of inflation. President Trump and Senator Tom Cotton of Arkansas advocated using the bill to also revoke the payment of joint responsibility, but Rep. Brady believes it will complicate the course of the bill. DPR passes H.B. 1 on November 16th.
The Senate Version of H.B. 1 was adopted on 2 December. Capital gain tax bracket is only slightly different from House version. The Senate bill focuses on the payment of joint responsibility, and the DPR/Senate conference committee maintains this change, but only begins in 2019. The Senate bill lifted the purchase of "versus purchases" (see above), called Larry Kudlow "backdoor" tax hike capital-gains ", but the conference committee deleted this provision, as well as the provisions passed by both houses which would make it more difficult to exclude gains on the sale of one's private home.About the carry interest (see above), the conference committee establishes a three- years (not one year) to qualify for long-term capital gains.
Tax bills are "assessed" to ensure their costs in lower government revenues are small enough to qualify under the Senate reconciliation procedure. The law requires this to use dynamic assessments (see above), but some of the bill's supporters say that the figures forecast economic incentives are too low and inflows of capital from abroad. To improve the rating, changes to personal income tax ends at the end of 2025.
Both Congressional assemblies passed H.B. 1 on December 20 and President Trump signed it into law on December 22.
- "Phase two"
On March 13, 2018, Trump appointed Kudlow as assistant President for Economic Policy and Director of the National Economic Council, replacing Gary Cohn, effective April 2. Kudlow supports the indexing of taxable investment cost bases to avoid tax increases that are only the result of inflation, and recently suggested that legislation allow Trump to direct the IRS to do so without voting Congress. Trump and Kudlow both announced the "phase two" tax reforms, suggesting a new bill that includes lower rates of capital gain.
References
Further reading
- "IRS Tax Tip 2015-21: Ten Facts You Should Know about Profit and Loss of Capital". IRS. 2015-02-18 . Retrieved 2017-12-28 .
- Black, Stephen (2011). "A Capital Gains Anomalies: Commissioner v. Bank and Results of the Lawsuit". St. Mary Law Journal . 43 : 113. SSRNÃ, 1858776 .
Source of the article : Wikipedia
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