We are always looking to add value to client relationships. One way to achieve this is to make our clients aware of potentialities that have a decent chance of becoming reality. Along these lines we want to give everyone a “heads up” on talk of additional tax stimulus which is gaining traction in political circles in D.C.
While attending an annual economic conference in Washington this spring the idea of indexing capital gains for inflation was brought up. Subsequently, a number of articles have appeared in the financial press, and of late an Op-Ed piece in the Wall Street Journal.
While a portion of the tax code has been indexed to inflation since the Reagan administration, the treatment of capital gains taxes has not. Essentially indexing capital gains for inflation entails adjusting the cost basis of an investment upward to reflect the impact of inflation. A higher cost basis decreases any embedded gain of an investment and importantly reduces the seller’s tax liability. This effectively incents people to sell investments they might not otherwise sell.
Consider the family farm bought years ago which has appreciated so much that the owner doesn’t want to pay taxes on the embedded gain, and instead will wait for a step up in cost basis at their death. They may be inclined to sell the property if the cost has been adjusted upward for inflation and the tax was less.
If enacted, such a provision would serve to increase economic activity and generate additional tax revenue for the government. A change to the code would not require congressional approval; the President can unilaterally enact such a provision. Will he? We don’t know but it is important that you are aware of the possibility and its impact on the economy.
