A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

Senate Finance Committee Chair Ron Wyden (D-OR) have proposed different ways to tax unrealized capital gains every year. Their shared goal is understandable, with trillions of dollars escaping income tax under current law. But each plan raises serious administrative and legal problems. My colleague, Rob McClelland, and I suggest a simpler, more effective approach: Tax unrealized gains of the wealthy at death at a higher rate than if assets are sold or given as gifts during life.

An unrealized gain is the increase in the value of an asset, like stock, which has not yet been sold. Taxing these gains is important because unrealized gains now account for more than half of the staggering amount of wealth of the very richest Americans, those with at least $100 million of net worth.

Current law encourages the wealthy to hold their assets until death, when those gains escape income tax permanently. This happens for two reasons. First, current law does not treat a bequest as a sale so no income tax is due at death. And, second, heirs are allowed a “stepped-up basis” where they never pay tax on any increase in the value of property during a decedent’s lifetime.

The results: Government loses a massive amount of revenue, wealth inequality is perpetuated through generations, and investors are encouraged to retain (or “lock-in”) poorly balanced, and less productive, portfolios. More than fifty years ago, two leading tax experts described the failure to tax gains of property transferred at death as “the most serious defect in our federal tax system.”

To fix this longstanding flaw, our plan would tax unrealized gains at death for the very rich (couples with more than $100 million and singles with more than $50 million) at the tax rate for ordinary income—currently 37 percent. But profits from sales or gifts of assets during life would still be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes.

Our proposal turns the existing incentive for appreciated assets on its head. Instead of encouraging people to hold their appreciated assets until death to avoid income taxes, our proposal encourages them to sell these assets before they die.

For example, imagine an entrepreneur who owns $100 billion of his company stock, for which he paid nothing when he founded the firm. Under our proposal, if he holds his stock until death, he’d owe $37 billion in income tax. But if he sells during life, he would owe $23.8 billion. And, if he wants to transfer his stock to his children without paying the $37 billion, he could give his stock to them during his life and pay $23.8 billion.

To determine the reach of our proposal, Rob reviewed data from the 2019 Survey of Consumer Finances, which he combined with Forbes 400 information (which is excluded from the survey). He estimated that taxpayers subject to our proposal have unrealized gains totaling about $7.5 trillion in 2022.

If these households realize $6 trillion of their $7.5 trillion of that gain during their lifetimes, and the remaining $1.5 trillion at death, our proposal would raise almost $2 trillion over time. Over the next 10 years alone, our plan could raise several hundred billion dollars, just like Biden’s and Wyden’s plan. (Our plan could raise more than theirs eventually, as our tax rate at death is higher than Biden’s and Wyden’s.)

For simplicity, we assumed the unrealized gains don’t grow over time, which likely makes our estimates conservative.

Taxing the wealthiest households on their unrealized gains at death is much easier to administer than Biden’s or Wyden’s plans to tax them annually. Our plan would rely on existing estate tax returns, and valuations, which the rich already file, while Biden’s and Wyden’s plans would require new annual filings for taxpayers during their lifetimes.

While few taxpayers would pay Biden’s or Wyden’s tax, many more would need to value all their assets annually, as taxpayers close to the line might move in and out of the regimes over time. How would the IRS determine whether all these taxpayers filed properly?

Finally, our proposal to collect taxes on transfers by gift or bequests is well -established under the US Constitution, but collecting taxes outside of transfers during their lifetimes raises unresolved legal issues.

Today, older, wealthier taxpayers often hang on to appreciated assets during their lifetimes, waiting to transfer them at death. Our plan encourages them to realize gains during life, which could lead to better balanced portfolios, broaden ownership of these assets, and generate much-needed tax revenue.

I am a Senior Fellow in the Urban-Brookings Tax Policy Center. I research, speak, and write on a range of federal income tax issues, with a focus on business

Source: A New Idea To Reduce Wealth Inequality: Tax Capital Gains At Death At A Higher Rate Than During Life

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Where Not To Die In 2022: The Greediest Death Tax States

Should death be taxing? Amid budget surpluses, states started slashing income taxes last year. But only two have made significant changes to their estate or inheritance taxes so far. Last year Iowa legislators decided to phase out the state’s inheritance tax by January 1, 2025. And this year Nebraska legislators made pro-taxpayer tweaks to its inheritance tax for deaths occurring on or after January 1, 2023.

Other jurisdictions have lessened the tax bite for dying in 2022—through previously scheduled changes or inflation adjustments. But some, without inflation adjustments, are still taxing estates at levels that haven’t budged for years, meaning more families are getting surprise death tax bills. In one of those states—Massachusetts—Democratic legislators are pushing for changes to spare more estates from the tax as part of a broader tax reform package this summer.

In all, 17 states and the District of Columbia levy estate and/or inheritance taxes. Maryland is the outlier that levies both. If you live in one of these states—or might retire to one—pay attention.

These taxes operate separately from the federal estate tax, which applies only to a couple thousand estates a year valued at over $12.06 million per person. (That number is set to drop roughly in half on January 1, 2026, when the Trump tax cuts that temporarily doubled the base exemption from $5 million to $10 million expire.) While few individuals need to plan around the federal estate tax, the state levies all kick in at much lower dollar levels, often making it a middle class problem.

Consider the current state estate tax in Massachusetts. The $1 million estate tax exemption hasn’t been adjusted for inflation since 2006, so it can hit the heirs of middle class folks who have seen their houses and retirement accounts appreciate.

“You can be real estate rich with a modest home, and your estate could be subject to this,” says Scott Cashman, a tax manager with Bowditch & Dewey in Worcester, Massachusetts. “It’s becoming more of an issue every year.” If the $1 million exemption amount set in 2006 had been adjusted for inflation, it would be closer to $1.5 million today.

Say a widow or widower died with a house worth $535,000, a $200,000 bank account, a $350,000 retirement account, and a $15,000 car, for a $1.1 million gross estate. Assuming $50,000 in deductions, the estate tax would be $20,500, he calculates.

(There’s no estate tax when assets are left to a spouse, but in this case the heirs are children.) If the house is worth $1 million, however, the tax would be $65,360— one third of the cash in the bank. Adding to the pain is what’s known as the cliff: Once the $1 million mark is crossed, the estate tax applies to everything over $40,000. “I don’t know if most legislators understand that,” he says.

A bill introduced by Democratic state senators would double the Massachusetts exemption amount to $2 million and only levy tax above that amount, removing the dreaded cliff. “We have such a surplus now, this is the time to do it,” says Cashman. “There’s broad-based support for reform.”

Inheritance taxes—levied in 6 states—can kick in at far lower levels, with the exemption and tax rate depending on the heir’s relationship to the deceased. In New Jersey, for example, if you leave your estate to a Class D beneficiary—including a nephew or non-civil-union partner—they’re taxed at 15% on assets up to $700,000 and 16% on assets above $700,000.

In Nebraska, lawmakers this year fell short of inheritance tax repeal but succeeded in chipping away at the state’s inheritance tax. The new law, effective Jan. 1, 2023, cuts the top tax rates (from 18% to 15%, for example) and increases the exemption amounts (from $10,000 to $25,000, for example). It also eliminates inheritance taxes for heirs under 22, and it makes unadopted step-relatives taxed at the lower rate for nearer family members and not the higher rate for unrelated heirs.

“Lawmakers wouldn’t agree to a general phase-down of the tax at this point that would apply to everyone, but they were willing to accept that if a younger person were to inherit property or cash (and we can use a lot more young residents and entrepreneurs in Nebraska) that it’s not in the state’s economic interest to take any of it away from them,” says Adam Weinberg, communications director with the Platte Institute, which is continuing its effort to repeal the inheritance tax in Nebraska.

Meanwhile, Connecticut, the least taxing of the estate tax states, is on schedule to increase its exemption to $9.1 million in 2022, and then to match the federal exemption for deaths on or after January 1, 2023. In an unusual nod designed to keep the richest taxpayers in the state, Connecticut has a $15 million cap on state estate and gift taxes (which represents the tax due on an estate of approximately $129 million).

Other states with 2022 changes: Washington, D.C. reduced its estate tax exemption amount to $4 million in 2021, but then adjusted that amount for inflation beginning this year, bringing the 2022 exemption amount to $4,254,800. Several states, which all have set their exemption amounts at different base levels, also see inflation adjustments for 2022. Maine’s is $6,010,000, while New York’s is $6,110,000. In Rhode Island, the 2022 exemption amount is $1,648,611.

I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997.

Source: Where Not To Die In 2022: The Greediest Death Tax States

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How to Avoid Capital Gains Tax

Saving for retirement is all about investing, and no matter how you go about it, you’re going to end up paying taxes on what you save and earn. Taxes on capital gains can eat up a significant portion of your earnings each year.

When you’re building wealth and planning for retirement, it’s important to not leave any money on the table. That’s why it’s important to point out that a fiduciary financial advisor can help you optimize a tax strategy and identify savings opportunities to lower your tax liability.

An advisor can also help you manage assets and plan for retirement, so you can worry less about meeting your financial goals. According to a 2021 Fidelity study, financial advice can add between 1.5% and 4% to account growth over extended periods.1

Handing over a chunk of your profit can be painful. Thankfully, there are a few ways that you can reduce the amount of capital gains taxes you will pay after selling an asset.

Investing involves risk and no situation is the same. This is in no way intended as a personal recommendation and investment decisions are solely those of the reader.

1.

Choose Long-Term Investments

Capital gains can be classified as either short-term or long-term, each of which has its own tax rates.

Assets you have held for less than a year are considered short-term. When it comes to earning short-term gains, expect to be taxed at your ordinary tax rate. This can be as high as 37%, depending on your total taxable income.

If you want to avoid that, you should consider choosing long-term investments instead. By holding an investment for a year or more, you will qualify for long-term capital gains tax rates.

Most long-term capital gains will see a tax rate of no more than 15%, though certain assets (like coins and art) can be taxed at a rate up to 28%. Depending on your income, you may even qualify for capital gains tax rates as low as 0%.

2.

Take Advantage of Tax-Deferred Retirement Plans

Your retirement accounts likely make up a bulk of your savings and future assets. It’s wise to optimize these as best you can by utilizing tax-deferred (and tax-exempt) plans, to save yourself from added capital gains taxes.

When contributing to a tax-deferred retirement plan, such as a 401(k) or traditional IRA, you’ll receive a tax deduction on your contributions in the current tax year. This can save you money on your income taxes today, as well as help you save even more toward the future.

Your money will also continue to grow over time. When you’re finally ready to sell your investments and withdraw, any growth in the account is taxed at your ordinary income rate, rather than being subject to capital gains like other investment accounts.

A tax-exempt account, such as a Roth IRA, doesn’t offer any tax benefits today, but grows tax-free until retirement. When you’re ready to use the money, your funds (and growth) can also be withdrawn tax-free, helping you avoid capital gains yet again.

3.

Offset Your Gains

If you hold a number of different assets, you may be able to offset some of your gains with any applicable losses, allowing you to avoid a portion of your capital gains taxes.

For instance, if you have one investment that is down by $3,000 and another up by $5,000, selling both will help you reduce your gains. You would only be subject to capital gains taxes on the difference – or $2,000 – rather than the full $5,000 gain of the second investment.

Another offset strategy is tax-loss harvesting. With this method, you can carry over losses from one tax year into the next, to help offset future gains. Tax loss harvesting only applies if your losses in a given year exceed your total gains.

Take Retirement Quiz

If you’re looking for a way to decrease your tax burden, we recommend finding a financial advisor. They can help you understand your options and look for ways to save money on your tax bill, make smart investments and plan for retirement.

If you need help finding a financial advisor, we created a free quiz to help Americans find and vet qualified financial advisors who serve their area.

This quiz asks you a few questions, then matches you with up to three fiduciary financial advisors. You can compare your advisor matches based on their specialty, pricing, and more. You even earn 3 free consultations with each of our matches, so you can compare them and be fully prepared to pick a financial advisor.

The hypothetical study discussed above assumes that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated and is based on the Fidelity Whitepaper “Why work with a financial advisor, November, 2021”. Please carefully review the methodologies employed in the Fidelity Whitepaper.

The value of professional investment advice is only an illustrative estimate and varies with each unique client’s individual circumstances and portfolio composition. Carefully consider your investment objectives, risk factors, and perform your own due diligence before choosing an investment adviser..1

Helping people make smart financial decisions

When you own an investment or other asset – such as real estate, land, a business or stocks, for example – and later sell that asset for a profit, you have realized capital gains. The tax that is then levied on the profit portion of your sale is called capital gains tax.

Depending on how your gains are classified, and your total taxable income for the year, your capital gains tax rate can vary. This percentage could be as low as 0% or as high as your ordinary tax rate. Consider consulting a financial advisor to determine how your gains will be classified so you can know what to expect when taxes are due. Click here to get matched with up to three advisors who serve your area.

Source: How to Avoid Capital Gains Tax

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Taxes 2022: IRS Says This Year ‘Taxpayers are Getting Our Message’

An estimated 160 million tax returns are expected to be filed this year, according to the IRS, and so far, the tax season has been running smoothly.

The tax agency has processed 6.6% more returns compared with a year ago, though it has received 2.1% fewer returns so far from taxpayers.

And according to Ken Corbin, wage and investment division commissioner and chief taxpayer experience officer for the IRS, the tax agency is well on its way to improve taxpayers’ experience for the 2023 tax year.

“So far we’ve received over 91 million individual returns this year and we’ve processed 89 million returns,” Corbin told Yahoo Finance Live. “What’s great about that is that we’re seeing that more taxpayers are getting our message. We’ve seen about a 96% electronic filing rate, which is outstanding.”

Processed returns

The IRS is still grappling with an unprecedented paper backlog of millions of unprocessed returns – some dating back to last year.

As of March 31, the tax agency had 2.7 million unprocessed individual tax returns dating back to 2021 and 2.3 million unprocessed returns from the calendar year 2022. Under normal circumstances, the IRS has a backlog of 1 million unprocessed returns entering a filing season.

To reduce the chances of further delays, the IRS urged taxpayers to electronically file their returns this year. The agency has also doubled down on measures to hire and reassign workers to get through the pile of unprocessed paper returns.

The IRS also redesigned its online website IRS.gov to make it more user-friendly so taxpayers could navigate and find information easily. The tax agency also added a new individual account that allows taxpayers to keep track of their personal information and tax status.

“The pandemic has really given us an opportunity to sit back and think about the journeys of the taxpayer as they interact with the IRS,” Corbin said. “It’s an opportunity to be innovative but to also bring cohesion around how we administer the taxes… we’ve introduced new technology like voice and chat bots on our phone as well as IRS.gov. And we’ve implemented taxpayer experience days, where taxpayers can come into our offices and talk with us [on the weekend].”

File electronically

If you have yet to file your tax return this season, and want to avoid any substantial delays with your refund, you should file electronically.

National Taxpayer Advocate Erin Collins recently told Yahoo Money that filing a paper return could delay your tax processing for 10 months or longer. This can be a real set back if you’re waiting on a refund or the remaining portion – if not the complete amount — of your Child Tax Credit.

“Number one, file electronically and use direct deposit – there are lots of options out there, including our IRS free-file program,” said Corbin.

Folks that received an advanced CTC payment last year or collected unemployment were encouraged to use the IRS.gov personal account to check how much they received in aid before filing, so their returns wouldn’t be held for a manual review, said the IRS.

Take advantage of IRS resources

The IRS has implemented a variety of programs to help individuals file their taxes as zero cost.

“More taxpayers seem to be seeking help in filing their returns, whether they are going to a tax professional or even using our Volunteer Income Tax Assistance program, where we offer free tax prep for taxpayers,” said Corbin.

VITA programs are run each year by IRS-certified volunteers to ensure lower-income households can get the tax preparation and services they need to file accurate tax returns and get their refund. VITA resources can also help non-filers claim tax credits they may be eligible for, including the Earned Income Tax Credit, the Child Tax Credit, and any stimulus checks they may not have received.

Still, the IRS recognizes that there is still work to be done to avoid the jammed paper backlogs it is currently contending with.

“We have to be sensitive to those taxpayers whose returns have not been processed – it’s critical to them,” Corbin said. “There are refunds in those returns and there are other reasons why people need those returns processed either for financial aid for college students or to obtain a loan. What this means for these taxpayers is that their experience has been a challenging one.

But at the IRS, we’re all hands on deck. We have a plan so that we can get better than healthy by the time we get to the 2023 season.”Tax day is right around the corner and if you haven’t filed yet, putting together your return in a rush may come back to bite you.

“You should never rush through the process of having your tax return prepared because you want to make sure that your tax return is complete and accurate,” Daniel Geltrude, founder of Geltrude & Company, recently told Yahoo Finance Live (video above). “The last thing that you want is you file your tax return in a rush, and then in 30 days you get a nice letter from the IRS saying there was a problem with your tax return.”

If you need more time to file your tax return, you can request for an extension that gives you until October 15 to file your taxes. But you must file your extension request by the April 18 deadline.

If you owe the IRS and need extra time to file your return and to pay, then you need to request an extension to file and an extension to pay. If you owe and only request an extension to file, you may face penalties and interest on the amount you owe.

If you are filing by mail and are waiting until the deadline to pay, a postmark alone may not be sufficient.

“​​As long as the envelope is properly stamped by the due date — April 18th — sending your check through the mail at that last moment you’re okay,” Geltrude said, noting, “you should also do that by certified receipt to make sure that you can prove timely filing and timely payment.”

Working remotely and the home-office deduction

Due to the pandemic, many people worked from home. Unfortunately, working remotely from home doesn’t mean you qualify for the home-office deduction.

“If you are an employee getting a W-2 for the work that you do, you are not entitled to take those home office deductions as an employee,” Geltrude said. “You need to be an independent contractor having your own business to take all of those expenses related to your business activity as a deduction against your income.”

By:

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

Source: Taxes 2022: IRS says this year ‘taxpayers are getting our message’

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IRS Temporarily Halts These 10 Scary Taxpayer Letters

Internal Revenue Service computers keep spitting out perplexing letters and notices to taxpayers, and today the agency announced that it’s going to stop the machines, at least temporarily, in an effort to help taxpayers and tax pros. The 2022 tax season kicked off on January 24 for filing 2021 tax year returns, but millions of taxpayers are still waiting for the IRS to process last year’s returns.

Example: You filed your 2020 tax return last April. The IRS cashed your check. Why are you getting an alarming CP-80 Unfiled Tax Return notice that says: “We haven’t received your tax return. What must you do immediately? If you’re required to file, please file today. If you’ve already filed, please send a newly-signed copy.”

Savvy tax pros know that the IRS is woefully backlogged, and the best response is to wait it out. A California tax preparer who filed on paper with a check attached last April emailed me that he got a CP-80 notice last month. The IRS cashed the check, but hasn’t gotten to his return—10 months later.

His plan: “IRS thinks I have overpaid; I can wait 6 months to see if they catch up on paper.” In the meantime, the IRS has updated its web site, Understanding Your CP80 Notice, to tell folks who are getting CP-80 Notices who have already filed their 2020 returns: “DO NOT refile.”

That’s all the IRS needs—more paper! As of the February 7 update to the IRS Operations page, the IRS has made some progress on whittling down the number of amended tax returns for tax year 2020 in processing (2.3 million as of January 8), but it hadn’t updated the number of outstanding individual returns for 2020 (6 million as of December 31).

“The IRS is opening mail within normal timeframes and all paper and electronic individual refund returns received prior (emphasis added) to April 2021 have been processed if the return had no errors or did not require further review.”

That backlog is causing problems down the line. Hence, the decision — after outcry from tax professionals and members of Congress — to stop sending some taxpayer notices and letters for now.

The IRS announcement notes that these automatic notices have been temporarily stopped until the backlog is worked through, and that the agency will continue to assess the inventory of prior year returns to determine the appropriate time to resume the notices. Some taxpayers might still get these notices and letters in the next few weeks. “Generally, there is no need to call or respond.” But watch out: If you believe a notice is accurate and you have a balance due, the IRS says that interest and penalties can continue to accrue.

Here’s the rundown of suspended notices and letters:

CP-80 Unfiled Tax Return(s) 1st Notice: This notice is generally sent when the IRS credited payments and/or other credits to a taxpayer’s account for the tax period shown on the notice, but the IRS hasn’t received a tax return for that tax period.

CP-59 and CP 758 (Spanish version): The IRS sends this notice when there is no record of a prior year return being filed.

CP-516 and CP-616 (Spanish) Unfiled Tax Return(s) – 2nd Notice: This notice is a request for information on a delinquent return as there is no record of a return filed.

CP518 and CP618 (Spanish) Final Notice -Return Delinquency: This is a final reminder notice that the IRS still has no record of a prior year tax return(s)

CP-501 Balance Due — 1st Notice: This notice is a reminder that there is an outstanding balance on a taxpayer’s accounts.

CP-503 Balance Due — 2nd Notice: This notice is the second reminder that a there is an outstanding balance on a taxpayer’s accounts.

CP-504 Final Balance Due Notice/3rd Notice/Intent to Levy: The IRS sends this notice when a payment has not been received for an unpaid balance. This notice is a Notice of Intent to Levy (Internal Revenue Code Section 6331 (d)).

2802C Withholding Compliance Letter: This letter is mailed to taxpayers who have been identified as having under-withholding of Federal tax from their wages. This letter provides instructions to the taxpayer on how to properly correct their tax withholding.

Two business notices are also being temporarily paused.

CP259 and CP959 (Spanish) Return Delinquency: IRS sends this notice when there is no record of a prior year return being filed.

CP518 and CP618 (Spanish) Final Notice -Return Delinquency: This is a final reminder notice that the IRS still has no record of a prior year tax return(s)

A coalition of taxpayer professionals, the Tax Professionals United for Taxpayer Relief Coalition, including the AICPA and H&R Block, is calling for more. They’ve asked the IRS to pause all automated compliance actions and provide relief from underpayment and late payment penalties. Stay tuned.

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I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997. Follow me on Twitter: @ashleaebeling and contact me by email: ashleaebeling — at — gmail — dot — com

Source: IRS Temporarily Halts These 10 Scary Taxpayer Letters

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