Various plans have been coming out from presidential candidates and non-presidential candidates on ways to provide Social Security with more funding, one non-presidential candidate, Ron Wyden, a Senate Democrat from Oregon recently released his plan, which would focus on a reform of the capital gains tax that could provide an additional $1.5 to $2 trillion over the next 10 years. A capital gain is an increase in the value of an investment or real estate that is received when the asset is sold. Below is a summary of Wyden’s proposal from the United States Senate Finance Committee, which Wyden is the ranking member of.
Equalization of Capital and Wage Tax Rates
The proposal would tax wage and capital income at the same rates. Middle-class taxpayers would not pay more in taxes than they do now. For example, a credit or exemption could ensure middle-class taxpayers do not pay higher tax rates on limited capital income.
Anti-Deferral Accounting System
Taxpayers with more than $1 million in annual income and/or more than $10 million in assets for three consecutive years are covered by the proposal. Applicable taxpayers would be covered until they fail to meet the income or asset threshold for three consecutive tax years.
Personal residences up to $2 million, retirement accounts up to $3 million and family farms up to $5 million are not counted when determining whether a taxpayer meets the asset threshold. Value above these thresholds will be counted toward the asset threshold. For example, if a taxpayer owns a $3 million dollar home, the first $2 million of value is exempt and $1 million is counted toward the asset threshold.
Tradeable Assets
Applicable taxpayers must pay tax on the gain or take a deduction for losses on tradeable assets like publically-traded stocks, bonds, derivatives and securities held at the end of each tax year. Losses would be subject to limitations to prevent abuse.
Non-Tradeable Assets
Tax due on gain realized from non-tradeable property such as real estate, business interests or collectibles will be calculated at sale or transfer through a lookback charge. The lookback charge would tax accrued gain and minimize the benefit of deferring tax. Senator Wyden is evaluating several possible methods of calculating a lookback charge, including an interest charge on deferred tax, a yield-based tax to eliminate the benefits of deferral or a surtax based on an asset’s holding period.
Exemptions for Personal Homes, Family Farms and Retirement Accounts:
Gains from the sale of primary or secondary residences would not be subject to the lookback rule until the combined property value of the residences reaches $2 million. Additional gain would be subject to the lookback rule. A similar exception will apply for the first $5 million in family farm value. Savings in tax-preferred savings accounts, such as IRAs and 401k plans, would not be subject to anti-deferral accounting and would be taxed in the same way as under current law.
