With the emergence of capital markets and the increase in government spending to unprecedented levels, recent changes are being introduced through legislation in Washington that are transforming the way capital gains taxes are levied.

To investors, this is no longer an issue of filing routine taxes; it is a very real possibility of a change in their financial situation. The changes proposed in the latest federal spending bill, intended to update capital gains rules that have not been effectively updated in many years, are likely to impact both short-term traders and investors significantly. Hiring a tax lawyer from Encino or another location can assist clients with capital gains taxes.

What Are Capital Gains and Why Are They Taxed?

Capital gains can be defined as the profit an individual or company earns when they sell an investment, such as stocks, property, or any other asset. These are divided into:

• Short-term capital gains (after one year) (which are taxed just like ordinary income and which can be offset by the deduction)
• Capital gains (on assets held more than one year), which are also taxed at lower rates of between 0 and 20 percent, are adjusted to income.

The new tax bill reform is aimed at reorganizing these rates, particularly for high-income earners and certain asset categories.

1.      Key Change: Higher Rates for Higher-Income Earners

The most dramatic headline provision of the new bill is to increase the long-term capital gains tax rates on individuals who receive above a specified amount of income, at which the new bill allows an increase in capital gains to be imposed.

Such earners can now have long-term capital gains taxed at reasonable income tax rates of up to 39.6 per cent, which effectively restricts the gain previously made by holding the asset in the long term.

Implication:

Wealthier individuals who sell at least part of their excess holdings or properties may face a capital gains tax that is almost twice the current rate.

2.      Effective Date Provisions: Watch for Retroactive Triggers

The suggested bill would include certain laws that could retroactively apply the new rates to sales made prior to the bill's adoption. This implies that you should sell now to avoid higher taxation, but you will not be protected in the event the bill becomes retroactive.

Investor Strategy:

As the scenario unfolds, if a significant sale of fixed assets is on the scenario board, consider seeking advice on whether to pursue accelerated transactions now or wait and watch.

3.      Treatment of Investment Income: Dividends and Interest

In spite of the fact that capital gains are at the most active position in the bill, other forms of investment income are under consideration as well:

• Qualified dividends can no longer be taxed at their preferential rate of 15% to 20%; instead, they are taxed like other income.
• Tax shields can also be lower on interest income from municipal bonds or treasuries.

This may primarily restructure the portfolio design, whereby retirement investors are interested in both tax efficiency and building income stability. Today, one can seek the assistance of a Pasadena tax attorney or someone who can help clients navigate the new norms of capital gain taxes.