The clock is ticking toward the 2010expiration of the favorable capital gainstaxation laws enacted under the Bush administration in 2003. This portends hugeimplications for individuals and small businesses alike because small businesses areoften structured as sole proprietorships orpass-through entities, so capital gains arepassed along to the owners, and becausestock ownership is now commonplaceamong Americans. In 1980, only 13 percentof Americans owned stock, but by 1998, thatnumber had grown to 52 percent. One thingis certain, the next president must deal withthe issue, and the options include everythingfrom maintaining the more favorable rates totreating capital gains as ordinary income.
“The sunset on the Bush legislation is nearing,” says John M. Wyson, tax partner withHaskell & White LLP. “The capital gains taxnow affects so many of us that when politicians argue that the capital gains tax is a taxon the rich, they are painting with an increasingly broad brush. Business owners shouldbe more interested than ever to hear whatthe candidates are proposing.”
Smart Business spoke with Wyson aboutwhat business owners should know aboutthe expiration of the capital gains tax ratesand the current positions of the leading presidential candidates.
How do capital gains and ordinary incomediffer in terms of rates?
The most common form of ordinaryincome is salary and wages, and it is taxed atprogressively tiered rates with brackets ranging from 10 to 35 percent. If capital gainsbecome taxed as ordinary income, it will betaxed at those same rates, and there’s somehistoric precedent for that because, prior to1921, capital gains were generally taxed atthe same rates as ordinary income. Then in1921, Congress enacted favorable tax ratesfor sales of long-term capital assets. Sincethat time, the tax rate on capital gains hasvacillated. In the mid-1980s, the maximumtax rate on long-term capital gains was set at28 percent until 1997 when it was lowered to20 percent. It was reduced to the present day15 percent in 2003. Although the rates havevaried, Congress generally remained consistent by encouraging longer-term investments.
Short-term capital gains, sales of capitalassets held less than 12 months, are still generally taxed at the less favorable ordinaryincome rates.
Will the political party controlling the WhiteHouse impact the new tax rate?
It’s perceived that Republicans generallywant to lower taxes and Democrats want toraise them. However, the capital gains ratewas raised in 1986, during President Reagan’sterm, and lowered in 1997, during PresidentClinton’s term. So, the political party of thepresident does not always dictate which waythe rate will go.
