Capital gains is the profit you earn from anything you sell, such as your home, your furniture, stocks you own or your boat. Almost everything you own and use for personal or investment purposes is a capital asset. The difference between the basis (what it cost you to buy) in the asset and the amount you sell it for is a capital gain or a capital loss. If you received the asset as a gift or inheritance, things can become a bit more complicated.
Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you sell it or otherwise dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Despite the U.S. having one of the highest capital gain tax rates in the world, earlier this year, during the State of the Union address, President Obama called for $320 billion in tax increases over 10 years. He proposed a top 28% capital gains rate that would apply to gains and dividends too, but in both cases only for couples making more than $500,000 per year. That was his short term goal. Ideally, he’d like to up the rate further, making the U.S. even less competitive.
As estate planning lawyers, we know that if it is indeed passed, it’s going to require big changes in the “planning” part of estate planning. Front and center in those challenges is what the president refers to as the trust fund loophole. He explained that it’s high time the wealthiest Americans begin to pay their fair share. Unfortunately, there are potential flaws in his efforts of leveling the playing field, so to speak. In fact, it’s entirely possible that it would greatly affect beneficiaries and would require an entirely new way of determining the cost basis on inherited assets. On the surface, that sounds little more than another frustrating rule, but once you delve a bit further, you begin to see just how convoluted this can become. Many families have various assets, whether it’s a family business or real estate and anything else of value would have to be traced back in order to determine the original cost. His plan is to eliminate the tax benefits associated with inheritances. It would tax capital gains based on the decedent instead of the step up basis for how those assets are passed on. The fear is that it could make it harder to protect assets from taxes.
Frankly, despite this announcement being made months ago, even today many agree that there are just too many moving parts and dynamics and unintended consequences that prevent this from becoming a feasible option. It simply doesn’t make a lot of sense. Of course, in estate planning, it’s crucial to completely understand the dynamics of every element of our planning efforts. If you’d like to learn more about capital gains taxes, your estate planning approach or how to prepare for retirement, we invite
If you’re looking to make sense of your estate planning efforts, we invite you to contact our offices today. Together, we can put together a strong estate plan that takes into consideration all of your tax concerns.