How a Change in Capital Gains Tax May Affect You

Washington, DC 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 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.

Do you have retirement investments?

If your money is placed in a retirement account or a pension account, these accounts could be affected in one way or another. Because the tax would affect profits of large funds, the market rate value of those funds could come into question. However, if the money collected from the capital gains tax changes goes toward funding infrastructure and investing into America, many of the companies that have to pay higher taxes today will likely earn more money long-term because of the growth that is created. If you are planning on retiring very soon, this could be of concern. However, if you are not retiring in the next 5-10 years, this could be very good for you.

Do you own a home?

If you have owned a home for a long time and the value of your home has increased a lot, then a capital gains tax increase could scare you. But it probably shouldn’t. The plan, which is still being ironed out, plans to increase the capital gains tax only for people earning over $1 million per year. If you are in a situation where you can sell your house and collect over $1 million in profit from the sell – then you may be concerned. Otherwise, this will not be a problem for you.

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. Yes, there is history of changes that have been positive and others that have been negative – but you never really know until the changes already happened. The question you want answered is: “will this affect me?” If you do not have millions of dollars in investments, then the changes as proposed will probably not affect you. They may affect the stock market, they may affect wealthy people, and that could cause some changes – 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.