How a Change in Capital Gains Tax May Affect You

By James W.

Washington, D.C. is advocating for sweeping changes to the United States tax code. As you’re probably well aware, the tax system in the US is incredibly confusing with caveats and loopholes abound.

Most Americans do not know how to navigate the tax system, and what you see on the news may not have anything to do with your own tax situation.

At the end of the day, you really just want to know: “How does this affect me?” Will a capital gains tax affect you? These scenarios can help you determine if a change in the capital gains tax could affect you.

Do you own “long-term” investments?

In the IRS world, a “long-term” investment is an investment that you have held for over a year. For example, if you have owned a stock in a company or an index fund for over a year, that is considered a long-term investment. When you sell that investment, you pay capital gains tax, instead of regular income tax.

With today’s tax code, that rate is usually much lower than the regular income tax rate. If you have a lot of long-term investments, the capital gains tax changes may affect you, but you will have to own a lot before it does. Chances are, you don’t own enough for it to matter in a direct way.

For 2024, there are no capital gains taxes for capital gains up to $94,050 for married couples or $47,025 for an individual filer. Some state taxes, however, may still apply.

Consulting with a financial advisor is always recommended.

Do you have retirement investments?

If your money is in a 401(k), IRA, or pension, you won’t pay capital gains taxes directly. However, changes to capital gains taxes could impact the profits of large funds and public companies, which may affect the market value of your investments.

If capital gains tax revenue is used for infrastructure projects and economic investments, companies could see long-term benefits from this growth. This might translate to higher market returns, which could be good news for your portfolio if you’re not planning to retire in the next five to 10 years. However, if you’re retiring soon, short-term volatility could be a concern.

Do you own a home?

If you’ve owned your home for a long time and its value has grown, you might wonder how changes to the capital gains tax could affect you. Fortunately, for most homeowners, this isn’t a major concern. Current tax rules allow you to exclude up to $500,000 in profit for married couples filing jointly (or $250,000 for single filers) from capital gains taxes, as long as you’ve lived in the home for at least two of the last five years​

Proposed changes to capital gains taxes are aimed primarily at individuals with annual incomes over $1 million, meaning most homeowners won’t be affected.

However, if your profit from the sale of your home exceeds these exclusion limits, or if your overall taxable income falls within higher tax brackets, some of your gains may be taxed at long-term capital gains rates​

When to consult a professional about capital gains taxes

Navigating capital gains taxes can get complicated — especially if you own multiple properties, have recently sold another home, or have income near the $1 million threshold.

To ensure you’re fully aware of your tax obligations and take advantage of any available exclusions or strategies, consulting a tax professional is always a smart move.

They can provide tailored advice based on your specific financial situation and help you plan your next steps effectively.

How do we know what to believe?

You will hear stories all over the place, and at the end of the day, you will never know for sure until time has passed.

The question you want answered is “Will this affect me?” If you do not have millions of dollars in investments, then the proposed changes will probably not affect you.

They may affect the stock market, they may affect wealthy people, and that could cause some fluctuation — but you have to look at both sides of the story. When a company is doing very well, usually it gives money back to shareholders through dividends or stock buybacks. It hires as it needs, but it won’t hire extra people when it doesn’t need them just because it has extra income. If you are not earning over $1 million per year or you do not own long-term investments, then this change is probably not going to impact you.

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