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Additional Tax Increases in Capital Gains Rates?

Though the Senate Finance Committee is always looking for new ways to reform our tax laws, they are again looking at capital gains rates to broaden the tax base in an effort to reduce individual tax rates.  It has been predicted that the tax break on dividends and capital gains will cease at the end of 2015.  Tax analysts' predictions suggest that the reform would tax dividends and capital gains as ordinary income. Additionally, it is possible that capital gains and dividend could be capped at 28%, assuming that the top individual rate continues to remain above 28%.

The reform would not give breaks to installment sales, and would increase the rate on the installments received after the rate change, although the sale was made in prior years. It is also expected that the holding period will not matter, and that there will be no break for assets held longer than one year.

An additional change worth noting….. The House of Representatives also has a draft tax reform plan that would eliminate an investor's right to the specific identification method. This method permits an investor to sell the highest-basis stock first.  If this method is eliminated, investors will be limited to using the average basis of the shares.  Analysts expect this proposal to make it into law.

Analysts' do not expect any of these proposals to take effect until after 2014, but it would be advisable for investors to consider taking capital gains this year or next, and also to carefully consider any plans for installment sales.  Investor's should be careful not to let “the tax tail wag the investment dog” but pay close attention to the coming tax reform. If you have questions on how this may affect you, please feel free to contact us.

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