With the possibility of a second wave of stimulus checks dwindling, President Donald Trump is looking to other methods to help the economy, including indexing capital gains taxes.
Capital gains refers to the profit made in buying real estate or stocks at a lower investment and then selling them later at a higher value. The difference in price (profit) is then taxed. With capital gains indexing, instead of paying tax on the actual amount of increased value, the original price is adjusted for the amount of inflation during that time. For example, if the original cost was $3000 and 10 years later the selling price is $5000, under current conditions the seller would pay tax on the capital gains amount of $2000. But if the rate of inflation during that time was 20%, the original investment would be adjusted to $3600, and the seller would owe taxes on only $1400, an adjustment of $600.
Normally, Trump would need the approval of Congress to pass tax legislation regarding capital gains taxes, but by indexing the gains, he could make it happen through an executive order. This is a move he considered a year ago, but since it would likely result in legal pushback, he dropped it at that time. He also felt it wouldn’t provide enough help for those in the middle class, at it’s possible the tax cut would benefit only the high-end investor, with as much as 86% of the benefits going to the top 1 percent of investors, according to the TaxProToday website.
Trump has already bypassed Congress when he made changes to the payroll tax deferral. Last month, after coronavirus relief attempts fell through, Trump issued an order to extend payroll tax deferral until the end of 2020 instead of ending in August, as originally planned. While this move may provide immediate relief to taxpayers in the form of higher take-home pay, there is concern about how reduced government income from taxes would impact already-struggling Medicare and Social Security Programs. However, large-scale participation by employers is in doubt, despite last-minute guidance.
Another concern about the payroll tax deferral is what would happen to employees in January when the deferred taxes would be deducted in addition to current payroll taxes due at that time. Many employees would be expected to spend what is essentially a tax-deferred loan, not realizing that without an act of Congress, those taxes would have to be paid back by April 2021. This could create a double deduction beginning in January. And if an employee leaves a company before January, business owners worry about being responsible for having to pay those taxes. Consequently, many employers are expected to opt out of the deferral.
With the payroll tax deferral already in place, it remains to be seen whether Trump will exercise his executive power once again by indexing capital gains in the hope of creating new jobs and boosting the economy.
