Of particular interest to investors is the administration’s proposal to raise the tax on long-term capital gains from its current maximum rate of 23.8 percent to a new rate of 40.8 percent for certain higher-income taxpayers: those with adjusted gross income exceeding $1 million if married filing jointly and exceeding $500,000 if married filing separately or individuals.
For example, for owners of pass-through entities, who receive “phantom income,” as a result of the undistributed earnings of the pass-through entity, such a rate hike would create a substantial tax burden should the pass-through entity dispose of appreciated capital assets.
For example, under current law, a gift of a long-term capital asset with a value $10 million and a basis of $5 million would not result in the imposition of any income or transfer taxes, provided that the transferor had sufficient remaining lifetime exemption.
Whereas, under the Green Book proposal, that same $10 million gift would trigger $1,632,000 in capital gains tax, assuming that none of the $1 million exclusion had previously been used .
Taxpayers should consult with their income tax and estate planning advisors to determine the appropriate response to these potential changes.
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