It was reported Monday that the current administration is studying a plan to cut capital gains taxes by $100 million over the next ten years by factoring in inflation. Steve Mnuchin (US Treasury Secretary) mentioned this possibility at the G20 meeting in Argentina in July. He said they were considering allowing Americans to account for inflation in determining capital gains tax liabilities (reported by NY Times).

Capital gains taxes are determined by subtracting the original price of an asset from the selling price and taxing the difference, usually at 20 percent. For example, if someone bought a stock for $10,000 in 1980 and sold it today for $100,000 she would owe cap gains taxes on $90,000 (about $18,000 of tax). However, if the original price of the stock were adjusted for inflation, that would bring the original cost up to $30,000, which would then make the taxable gain only $70,000, and saving $4,000 of tax for the investor. Let’s look at that in a diagram.

Current Tax Law Proposed Change
Selling Price of Stock  $ 100,000 Selling Price  $ 100,000
Original Price  $   10,000 Adjusted Original Price  $   30,000
Taxable gain  $   90,000 Taxable Gain  $   70,000
Tax at 20%  $   18,000 Tax at 20%  $   14,000

 

A quick calculation shows that the investor saves 22% of the taxes after adjusting the original costs by changes in inflation. That’s good news potentially for many seniors who have been holding stocks for many years and selling those stocks for retirement income.

This is, of course, only a proposal. The Treasury is studying the economic costs and the impact on growth in the economy. The proposal will likely spike challenges and prompt arguments that the administration only cares about making the rich richer.

A similar proposal was rejected during 1992 Bush Congress. Capital gains taxes were unchanged in the $1.5 Trillion tax law signed in 2017. But some Republicans were positive, saying the change would produce a windfall in tax revenues for the government as stock sales increase.   Rep. Kevin Brady of Texas (Chair of the Ways and Means Committee) said ‘I think we ought to look at not penalizing Americans for inflation’.

Market Minute – August 3, 2018 — More Noise

Yes, we were asked what we thought about the FED comments earlier this week, and our reply was that it’s just ‘more noise’. It was a normal week in which we (all) were bombarded with information from sources as diverse as the FED, TV analysts, brokerage firm analysts, economists’ projections, newspapers, junk mail, neighbors, war reporters, fake news, and even my older brother!

Making investment decisions without a methodology is absolutely a gamble.  And yet there are academics who advocate that markets are efficient (which means everyone has all the available information at the same time, and so no one can possibly get an advantage over anyone else) – truly preposterous! Add to that the concept that ‘investors are rational’ and it gets even worse. Personally, I believe it’s truly sad that our educational system is tied to this common and unchallenged line of thought.

All of this is noise is just that, noise and nothing but.

Noise is the short-term interference that causes investors to deviate from their well-thought-out investment plan. It’s difficult to ignore because at the time it seems so important. The emotional ups and downs of trying to use all of this information can have a very negative affect on your wealth (and your health as well!).

Most investors would do well to read a weekly publication on the week-end. This would summarize the events of the week and then be a few days old – consider it ripening. Free markets have always and will always ebb and flow based on the laws of supply and demand – which is the grand total of all opinions of those investors who are participating in the market with real money. All of those others – the TV personalities and experts are just creating noise.

And so once again, I’d like to recommend a cure for the noise in the markets today. Turn off the TV and your internet ‘market news’. You may get some extra rest, and most certainly won’t miss anything of importance. 

  

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

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