Should you worry about Biden’s 40 percent capital gain tax proposal?
Updated: Jun 8
The market has fallen sharply on April 22nd because of a potential substantial rise in capital gains tax. As many of you, who invest in financial products as a part of your retirement savings plan or IRA, may start worrying about potential massive tax consequences and may start thinking about liquidating your positions. Think about it twice.
What is a capital gains tax? A capital gain occurs when you sell a financial asset for more than you have paid for it. Once you have realized the gain from your investments (actually sold them), it is treated as a capital gain and taxed by the government.
Currently, long-term capital gains tax rates are broken down into 3 brackets (0% for income of up to $40,400; 15% for income between $40,401 — $445,850; and 20% for income of more than $445,850). Short-term capital gains are taxed as ordinary income.
First, the proposed raise from 20% to 40% will reach only individuals with an annual income of more than $445,850. Second, you should remember that any earnings your contributions produce during the time they remain in your retirement savings plan or IRA account are tax-free. No matter how many times you sell investments that have increased in value, you won’t owe capital gains tax on any profit you make. Yes, the potential for a doubled capital gains tax for wealthy individuals somewhat alarming but should not be a reason for panic for middle-class Americans.
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