Tax Blog

Capital Gains Tax Provisions that help Secure your Savings

When politicians need to generate revenue for new and existing programs, they often suggest increasing or modifying the capital gains tax. Oftentimes this sort of tax hike is advertised as a way of taxing only the wealthy without adversely impacting the majority of Americans. However, while increasing taxes on capital gains is one way policymakers can generate revenue, doing so will also negatively impact the incentive for long-term saving. Today we will be looking at how some suggested methods of modifying the present capital gains tax could adversely affect taxpayers.

An important feature of capital gains in the current tax code is the ability to defer them, meaning a tax payer can choose when they realize capital gains and pay tax on that income, which allows them to reduce their tax liability. For instance, taxpayers can choose to realize a gain in a year when they have less income, possibly allowing them to avoid higher marginal income tax rates. Even on its own, deferral reduces the present value of the tax burden associated with a capital gain.

Another perk for capital gains is the step-up in basis, which allows a deceased taxpayer to pass property to an heir without incurring capital gains tax liability on any appreciation in the property’s value that occurred during their life. This policy increases the basis of property transferred to an heir to its fair market value, meaning any appreciation in the property’s value that occurred during the decedent’s lifetime goes untaxed.

Limiting or eliminating these provisions associated with capital gains would likely generate revenue. But doing so would also discourage saving, and heavily incentivizes consumption, for better or for worse. Whether or not such provisions or worth keeping are up to the individual, but modifying the capital gains tax would force everyone to reevaluate their savings plans in the long term, so it is certainly something that you should keep an eye on.

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