The Trump administration has been teasing high-income taxpayers with a big tax break on capital gains. However, so far, no decision has ensued. Treasury Secretary Steven Mnuchin has deferred to Congress, which hasn't proposed anything concrete. The Treasury Department says it's studying the impact the change would have on the economy and whether the tax break could be put into action without congressional backing.
The change proposes a reduction in the tax on stock and real estate profits, known as capital gains, and would adjust the final tax bill based on inflation over the time the asset was held. Currently, capital gains are calculated by subtracting the sales price from the original price paid for the asset. The difference is taxed at full value, regardless of inflation.
Why People are Waiting to File (and Why It's a Bad Idea)
Let's say you bought stock 28 years ago for $100,000 and sold it at $300,000, for a $200,000 capital gain. Uncle Sam would take 23.8 percent, for a tax bill of $47,600. However, if an adjustment for inflation decreased the profit to $103,000, you'd pay $27,514.
Unfortunately, many people are delaying their quarterly filings, waiting for the reduction to take effect. This is a dangerous waiting game that puts your assets at risk, especially with Democrats digging in to oppose the cuts. Unless you've consulted a tax attorney, this is a bad idea that could cost you big in penalties.
Opposition to the Proposed Change
Democrats vowed to defeat the proposed capital gains tax break, citing the negative impacts it would have on the growing deficit. House Democratic Leader Nancy Pelosi has called the measure a tax scam for the wealthiest Americans. Democrats believe the measure would line the pockets of the wealthiest individuals while contributing to stagnant wages and soaring health care costs.
It's uncertain when, if ever, the change could gain enough traction to pass.
Avoid Penalties, Work with a Tax Attorney
By working with a CPA or tax attorney, you can safely take advantage of an automatic extension for 6 months, if you do so before the filing deadline. You don't even need a reason. This isn't the whole answer, however. For taxpayers who owe taxes, payment is required by the filing date. Your CPA can make sure you file in time and get the amount correct. Trying to figure this out on your own could result in interest and penalties. Currently, the IRS charges four percent compound interest, for penalty of 0.5% per month.
Ask an experienced tax attorney to file an extension to avoid filing late. Remember that the late filing penalty can cost up to 10 times the amount of not paying at all. If the capital gains reduction is signed into law before the end of 2018, you could still receive a break on capital gains. Until then, it's better to continue with business as usual. You need to work with a professional tax attorney that deals with the IRS regularly. They know the rules and where the IRS may have some flexibility. Since we work with them on a daily basis, you are more likely to get the best possible outcome. Our team of Attorneys, CPAs, and Enrolled Agents are here to answer all your tax questions. Call Travis W. Watkins Tax Resolution and Accounting Firm now at 800-721-7054 for your Free consultation.