Capital gains rates have been at historic lows since 2003. The result has been slim tax bills enjoyed by investors who have sold and taken gains, and record U.S. federal budget deficits.
The deficit, running at about $1.4 billion per day, is not entirely the result of lower capital gains rates, but it will have to be reduced somehow Ñ and soon. President Bush will not raise taxes before he departs next January, so the task will be left to the next administration/Congress. Looking at the adjacent chart of historical long-term capital gains rates, it seems too easy for Congress to try to reduce the deficit in part by raising capital gains rates to a level more in line with historical rates.
If I were a betting man, I’d wager that it’s coming. Rates will rise by 2010 unless Congress enacts new legislation, probably 100% (given the deficit).
What can you do about it? Pretty simple. Take your gains now. That is, if you plan to sell an asset that has appreciated in value, do it before the tax law changes.
If you sell a business and take a $1 million gain, the current 15% long-term rate means your tax bill will be $150,000. If the rate rises to 25%, your bill will be $250,000. That’s a lot of money.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
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Dear David,
I’m the senior executive editor at Floor Covering News, the leading trade magazine to the industry, and I receive your informative newsletter, The Business Owner Journal. It focuses on many of the issues all small businesses face, which is why I enjoy looking through each edition.
While reading the July/August edition, a glaring mistake caught my eye. In “Cap Gains Rate Rising,” you explain that the take rate is going up from 15 percent to 20 percent and you give an example of how this may affect someone. You point out the difference in how much someone would pay in tax this year compared to next ($30 in 2010 and $40 in 2011).
Up until now, all is fine, then come the final four words of the first paragraph: “a 25 percent increase.” This is patently wrong. It is really a 33-1/3 percent increase (the percentage is figured using the difference of the two figures (10) and dividing into the original number (30), not the new number, so a $10 increase from $30 is one-third or 33-1/3 percent.
Yours Truly,
Matthew Spieler
Editor’s Note: Mr. Spieler, thank you very much for bringing this to my attention. You are right. We goofed.