taxing unrealized gains

[Tim]

Beautiful summary. I was initially reluctant to utilize Roth accounts because I feared a tax law change.

I had a similar fear. Taxing gains at marginal rates for Roth rather than capital gains for taxable. I thought the Stretch for IRA’s was invincible.
Shows what I know about the insurance lobbyists!

[Hatton]

When does Congress care about being fair. It wouldn't be the first time Congress changed the rules:

• When Social Security (SS) was first introduced. Congress justified not granting a deduction for for SS taxes by promising that SS benefits would not be taxed.
• So much for that promise. SS benefits have been taxed over very low limits* for ~4 decades. Not to mention, those limits are not indexed for inflation.
• For most WCI forum members, 85% of their SS benefits will be taxable. Let's see, no deduction for contributions (via mandatory taxes) and withdrawals (benefits) taxable.
• How is that any different than suddenly deciding to tax Roth withdrawals.

• Up until 1991 Medicare was subject to the same maximum taxable earnings limit as SS. From 1991 - 1994, the limit was phased out.
• In 2003 the income-related monthly adjustment amount (IRMAA) was added to Medicare Part B premiums. In 2011 Obamacare extended that to Medicare Part D premiums.
• Non-IRMA Medicare premiums are ~25% of the attributable program costs. IRMAA premiums can be up to 85% of the attributable program costs.
• So high income individuals can now pay far higher Medicare taxes and still pay far higher premiums for benefit.

• For ~four (4) decades, the law of the land was that non-spouse beneficiaries of an owned IRA could opt for lifetime RMD distributions. Many individuals did significant estate planning based on this.
• None of this stopped Congress with blowing up many estate plans by eliminating lifetime RMDs of non-spouse beneficiaries except for an eligible designated beneficiary (EDB)

etc...

Beautiful summary. I was initially reluctant to utilize Roth accounts because I feared a tax law change.

[AR]

In my opinion the best argument to having a lower capital gains tax rate is that a decent chunk of capital gains is just inflation.

Discounting the long-term gains promotes long-term investments which I would imagine is stabilizing for economy.

If you had to hold an asset for 5 years to make it a long-term gain? I would be okay with that.

I think that is all reasonable. But it would seem like we could apply similar arguments to labor. Lower income taxes encourage labor, which is good for the economy.

Nevertheless, I'm not opposed to having capital gains being taxed somewhat less than labor. It just seems that the differential that has been arrived at with the current tax code is too high.

I think that we would have been better off if income tax rates were a bit lower and capital gains taxes were a bit higher. This is mostly a thought exercise, since I'm unaware of any real world policy initiatives to address this specific problem.

[Lordosis]

In my opinion the best argument to having a lower capital gains tax rate is that a decent chunk of capital gains is just inflation.

Discounting the long-term gains promotes long-term investments which I would imagine is stabilizing for economy.

If you had to hold an asset for 5 years to make it a long-term gain? I would be okay with that.

[AR]

The lower capital gains taxes are to encourage investment & saving.

Then I guess lower marginal income tax rates, should encourage working. Is that bad?

Nevertheless, as I said, it's easy to argue they shouldn't be the same. How you justify the massive difference between the two when you get to high earned income levels makes no sense to me.

Especially here where such income levels aren't uncommon, I would love to see someone try. If you are some doctor working really hard and pulling in a 7 figure income, you should be at almost 2x the marginal tax rate of someone who makes the same amount investing in VTI? How does that make sense? I'll accept that there are reasons we might want to make the capital gains lower than income earned from labor, but that difference is hard to swallow.

Also, this money has been taxed (as Hatton said) and now they are changing the rules mid-game.

As I mentioned in my response to Hatton, it's always going to be mid-game for someone, so if that's your beef we could never change the tax code. Also presumably there are ways to phase in something different to pacify the Hattons of the world,

Also "this money has been taxed" is really just a matter of how you look at it. The basis was taxed, the earnings on that never were. I get that many people would prefer not to look at it that way, but it's not untrue.

[AR]

Also people plan based on the current taxation system. It hardly seems fair to jack up capital gains rates or start taxing Roth IRA money.

Sure, but if that's the argument, then we could never change the tax system because someone is always making plans based on the current system. I suppose there are probably ways to phase it in or something like that.

[Outdoors]

So what about the small business owners: especially, what about physicians who own medical office buildings, surgery centers, imaging centers, or dentists' offices as others have mentioned?

Especially when they expand this beyond 100 million down to lower levels. Say the Government values your practice and real estate at 5 million dollars, but you don't have the liquid cash to pay taxes on your unrealized gains - do you just have to sell to pay your taxes?

Where have I heard this before?

[spiritrider]

When does Congress care about being fair. It wouldn't be the first time Congress changed the rules:

• When Social Security (SS) was first introduced. Congress justified not granting a deduction for for SS taxes by promising that SS benefits would not be taxed.
• So much for that promise. SS benefits have been taxed over very low limits* for ~4 decades. Not to mention, those limits are not indexed for inflation.
• For most WCI forum members, 85% of their SS benefits will be taxable. Let's see, no deduction for contributions (via mandatory taxes) and withdrawals (benefits) taxable.
• How is that any different than suddenly deciding to tax Roth withdrawals.

• Up until 1991 Medicare was subject to the same maximum taxable earnings limit as SS. From 1991 - 1994, the limit was phased out.
• In 2003 the income-related monthly adjustment amount (IRMAA) was added to Medicare Part B premiums. In 2011 Obamacare extended that to Medicare Part D premiums.
• Non-IRMA Medicare premiums are ~25% of the attributable program costs. IRMAA premiums can be up to 85% of the attributable program costs.
• So high income individuals can now pay far higher Medicare taxes and still pay far higher premiums for benefit.

• For ~four (4) decades, the law of the land was that non-spouse beneficiaries of an owned IRA could opt for lifetime RMD distributions. Many individuals did significant estate planning based on this.
• None of this stopped Congress with blowing up many estate plans by eliminating lifetime RMDs of non-spouse beneficiaries except for an eligible designated beneficiary (EDB)

etc...

[Tim]

Also people plan based on the current taxation system. It hardly seems fair to jack up capital gains rates or start taxing Roth IRA money.

Make no mistake, “fair share” is very subjective.
Some favor a lump sum redistribution and some favor a graduated redistribution and some favor an “equity based” redistribution.
“Status quo” requires acceptance or rejection of the current definitions. The goal of wealth redistribution is clear, the definitions of “fair share” is not (income, wealth, or taxes).

[Hatton]

Part of why you think this is because your brain is in the status quo. You were already taxed for your labor at high rates. But why should that ever have been the case? It is somewhat arbitrary that labor is taxed at such high rates compared to capital gains. You can certainly make the case that they shouldn't be taxed exactly the same but the enormous difference between taxes on labor and capital gains that currently exists does not make a lot of sense to me.

Also people plan based on the current taxation system. It hardly seems fair to jack up capital gains rates or start taxing Roth IRA money.

[Tangler]

Part of why you think this is because your brain is in the status quo. You were already taxed for your labor at high rates. But why should that ever have been the case? It is somewhat arbitrary that labor is taxed at such high rates compared to capital gains. You can certainly make the case that they shouldn't be taxed exactly the same but the enormous difference between taxes on labor and capital gains that currently exists does not make a lot of sense to me.

The lower capital gains taxes are to encourage investment & saving.

Also, this money has been taxed (as Hatton said) and now they are changing the rules mid-game.

They have a spending & debt problem.

Taxes are going one way. Up.

I doubt there will be any decreases.

Income gets hammered. Yes.

That is going to continue.

Increasing capital gains taxes will not make up for over-taxing high income.

Life is not fair. taxes are not even close.

[Tangler]

your plan has hedges against future tax uncertainty but not against the uncertainly of the dollar. Just saying.

True. I live in America, work in America & invest in USA.

So does almost everyone on this forum.

[AR]

I could not disagree more. I feel like I paid taxes on the money as I earned it by working. I could of just spent every cent but I saved and invested. So I really resent paying taxes on investment income. An argument can be made about inherited wealth since it is not earned. I think many folks work hard to leave their kids something so there it is. I have no problem with taxing carried interest as income.

Part of why you think this is because your brain is in the status quo. You were already taxed for your labor at high rates. But why should that ever have been the case? It is somewhat arbitrary that labor is taxed at such high rates compared to capital gains. You can certainly make the case that they shouldn't be taxed exactly the same but the enormous difference between taxes on labor and capital gains that currently exists does not make a lot of sense to me.

[jacoavlu]

As a country we have a lot of debt (national debt) and we rarely worry about the annual federal deficit (rarely balance annual budget).

National debt is equivalent to $242,500 of debt per tax payer or $91,226 per citizen (ask yourself why these are so different?!)

National debt.

Is it a problem? Can it ever become a problem?

Many on this forum tell me it is irrelevant and completely different than personal (individual) debt.

I hope these forum members are correct.

I do worry that it is unsustainable. I don't think many in congress do anything to address it. Rarely seriously discussed.

Personal finance always starts with the simple idea (Rick Van Ness' rule 0, WCI latest podcast): spend less than you make.

I hope the people who tell me I am too simple and that our national debt is irrelevant and inconsequential are correct.

Pascals wager. Consider consequences and probabilities not just probabilities. Rare disastrous consequences have relevance.

To bring it back to the original post: Wealth taxes. Taxing capital gains. I would not be surprised in the least.

In an attempt to become a tax alpha dog In retirement I am planing on eating from 3 different doggie bowls: Taxable, Roth, Tax deferred (IRAs).

No one knows what will be the most advantageous, so I want to have all 3.

Would I leave the USA to escape wealth taxes..............not now..........but I could see a global exodus of retired wealthy people.

There is already an exodus from CA to Texas and from NY to FL etc.

Geographic arbitrage is not limited to one nation. If some place becomes welcoming, and we continue to punish success, people might move.

https://www.usdebtclock.org

https://www.amazon.com/Overtaxed-Investor-Slash-Your-Alpha-dp-0997059621/dp/0997059621/ref=dp_ob_title_bk

your plan has hedges against future tax uncertainty but not against the uncertainly of the dollar. Just saying.

[Tangler]

Supposedly a wealth tax would “work” better in the USA since it taxes income regardless of where you reside unlike virtually every other country in the world. So you’d have to renounce your citizenship to wriggle out of it.

I have no idea how an exit tax would work or how it could be enforced. What are the other financial consequences of this? If you have $100M surely you don’t give a hoot about keeping SS and Medicare.

Yeah, SS and Medicare...........If it gets bad enough, people will give that up and go.

This might be how it ends.

Some other nation welcomes our best, brightest, most wealthy..........I don't think it happens soon but look how much our country has changed just in the last 10 years.