Let’s discuss the taxation of capital gains, in light of the election and the post-2025 expiration of many provisions in the 2017 Tax Cuts and Jobs Act.
Long-term capital gains get favorable rates. Profits from the sale or exchange of capital assets held for over a year are generally taxed at 0%, 15% or 20%. The rates are based on income thresholds adjusted annually for inflation. For 2024, the 0% rate applies to taxpayers with taxable income up to $47,025 on single returns, $63,000 for head-of-household filers and $94,050 on joint returns. The 20% rate begins at $518,901 for singles, $551,351 for household heads and $583,751 for joint filers. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. Before 2018, long-term capital gains rates were based on your tax bracket. The 0% rate applied to people in the 10% or 15% income tax brackets, the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for filers in the other brackets. The pre-2018 rules are slated to return after 2025, unless Congress acts.
Kamala Harris proposes to hike the top long-term capital gains rate to 28%. Her proposal would apply only to the extent that a taxpayer’s taxable income exceeds $1 million. For example, a couple reports $1,400,000 in taxable income on their joint return, $500,000 of which is long-term capital gain. $400,000 of the capital gain would be taxed at 28%, and $100,000 would be taxed at 20%. And she may adopt Joe Biden’s idea to tax unrealized capital gains at death. This proposal would treat death as a realization event for income tax purposes… a deemed taxable sale at fair market value, with capital gains and losses reported on the decedent’s final income tax return…with a $5 million lifetime gain exclusion.
Donald Trump wants to make the tax cuts in his 2017 law permanent and take it further with even lower federal income tax rates for individuals. But what else does Trump propose to do with long-term capital gains? He hasn’t said, but Project 2025 might provide some insights into this. This policy blueprint, which was designed for the next Republican administration and spearheaded by the Heritage Fdn., suggests two changes to the capital gains tax.
First, Project 2025 calls for a 15% top long-term capital gains tax rate. It also supports the idea of indexing capital gains for inflation each year. Essentially, if this concept was enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and time of sale. Say you bought stock in early 2010 for $10,000 and sold it in Jan. 2024 for $35,000. Absent indexing, you’d have a $25,000 long-term capital gain ($35,0000–$10,000). With indexing, using the Chained CPI-U inflation measure, your basis would jump to $13,740, making your gain $21,260 ($35,000–$13,740), thus lowering your tax bill. This idea may sound simple, but it’s not. There are lots of complexities involved. Trump was all over the map on capital gains indexing during his presidency. He first touted the idea and then nixed it. We don’t know where he stands on it now.
PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.