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ch23_capital_gains

ch23_capital_gains - Chapter 23 Capital Gains Taxation...

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Chapter 23 Capital Gains Taxation capital gain - the difference between an asset’s purchase price and sale price taxation on accrual - taxes paid each period on the return earned by an asset in that period assets that earn interest (savings account, government bond…)→ taxed on accrual taxation on realization - taxes paid on an asset’s return only when the asset is sold sell a painting→ taxed on the return after it is sold ●taxation upon realization (as opposed to accrual) generally leads to a reduction in tax obligations why? accrual- government collects revenue earlier and earns interest instead of you EX) buy a painting for $100/ increases in value 10% per year/ hold for 7 years/ t= 20% $100 in bank account/ earns 10% per year/7 years/ t= 20% accrual→ realization→ in the US tax code, there is an implicit tax subsidy to savings in the form of capital-gains-producing assets Why is it impractical to tax capital-gains producing assets on accrual? •might be hard to measure year-to-year accrual in value of certain assets hard to measure year-to-year accrual in value of housing or painting? • individuals might be able to finance required tax payment only by selling asset stock value doubles→ resulting gain to a person’s wealth may be so large that there is no way he could pay the annual tax bill without actually selling a large share of his stock (inefficient) other subsidies to capital gains “step-up” of basis at death before death→ capital gains tax burden is based on sales price – purchase price (basis) after death→ capital gains tax burden is based on sales price – price of asset at the time of death EX) Betsy buys painting for $100 (age 20) and it is now worth $10,000 (age 75) capital gains tax rate=15% capital gain on which taxes are paid? capital gains taxes paid family sells day before death family sells day after death
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Year 2008 Capital Gains Tax Rates Ordinary Income Rate Long-term Capital Gain Rate Short-term Capital Gain Rate 10% 0% 10% 15% 0% 15% 25% 15% 25% 28% 15% 28% 33% 15% 33% 35% 15% 35% Short-term capital gains are defined as investments held for a year or less before being sold. ●Congress has typically shown a preference for long-term investment by having a capital gains tax rate lower than the ordinary income rate ●only long-term capital gains get preferential treatment- short-term capital gains (from property held for one year or less) are taxed at the same rate as ordinary income •qualified dividends, which were previously taxed at ordinary income rates (as non qualified dividends currently are), are currently taxed at long-term capital gain rates •within long-term capital gains, gains on certain real estate, collectibles, and small business stock each have their own tax rates •for individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year •exclusion for capital gains on housing not pay capital gains on house sales if individuals put those gains into a new house purchase
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