Investing Thread

[MuggsyB]

Or we could do away with the notion of qualified dividends with their lower tax rate, and just tax dividends as regular income.  I get the problem with taxing unrealized gains, but if the income off those stock holdings were taxed normally, I think there would be more equity in the system.

Because right now, using Wags' example above, Joe Billionaire isn't paying himself much of a salary from his company, he's just paying himself qualified dividend income at the lower tax rate.

How exactly would they tax it and what would happen with unrealized losses per year?  Would they tax the current 20% rate per year?    Another thing to consider is if billionaires are taxed in this fashion wouldn't there be a lower incentive for them to have their money in the market?  Because the fact of the matter is 50% of the country has money in the stock market.  A lot of the bull market has been a result of big-tech and a handful of additional stocks which has an enormous impact on peasants like us.   

[MuggsyB]

I don't say any of this. It's not my proposal, and I doubt it will become law.

As for what I understand about your questions ...

1. I assume you're not a billionaire; if not, it wouldn't apply to you one iota.

B. If you were a billionaire, I wouldn't feel very sorry for you.

3. As I said, I doubt this proposal sees the light of day.

D. I don't have answers for most of the questions that you're all stoked about.

Billionaires aren't superheroes and have as many whackos as any group of people.   

[Frenns Liquor Depot]

One way to get rid of perpetual deferral of income: All loans with Stock or investment accounts as pledged collateral are taxed as regular income.

[The Hippie Satan of Hyperbole]

How exactly would they tax it and what would happen with unrealized losses per year?  Would they tax the current 20% rate per year?    Another thing to consider is if billionaires are taxed in this fashion wouldn't there be a lower incentive for them to have their money in the market?  Because the fact of the matter is 50% of the country has money in the stock market.  A lot of the bull market has been a result of big-tech and a handful of additional stocks which has an enormous impact on peasants like us.   

I feel like you are not responding to my post because I said "I get the problem with taxing unrealized gains."  I am talking about taxing 1099-DIV income as ordinary income and not as capital gains income.

[jesmu84]

Compensation and building wealth for the super wealthy has changed dramatically from the early 20th century. Our tax structure needs to change as well.

[MU82]

Billionaires aren't superheroes and have as many whackos as any group of people.

Did anybody claim that billionaires were superheroes or that there aren’t whacko billionaires? Who are you arguing with here, Muggs?

[MuggsyB]

Did anybody claim that billionaires were superheroes or that there aren’t whacko billionaires? Who are you arguing with here, Muggs?

I'm not arguing.  I just thought it should be noted in parallel with your billionaire points. 

[Hards Alumni]

Or we could do away with the notion of qualified dividends with their lower tax rate, and just tax dividends as regular income.  I get the problem with taxing unrealized gains, but if the income off those stock holdings were taxed normally, I think there would be more equity in the system.

Because right now, using Wags' example above, Joe Billionaire isn't paying himself much of a salary from his company, he's just paying himself qualified dividend income at the lower tax rate.

Yup.

[Hards Alumni]

Billionaires aren't superheroes and have as many whackos as any group of people.

They're usually the opposite of superheroes. 

[MuggsyB]

They're usually the opposite of superheroes. 

Ha!  I'm pretty much with you here.  There's this instantaneous asshead vibe that I get from a lot of them.  That doesn't mean there aren't many that are cool and humble,  but in general I don't particularly envy them or their god complexes. 

[jesmu84]

Or we could do away with the notion of qualified dividends with their lower tax rate, and just tax dividends as regular income.  I get the problem with taxing unrealized gains, but if the income off those stock holdings were taxed normally, I think there would be more equity in the system.

Because right now, using Wags' example above, Joe Billionaire isn't paying himself much of a salary from his company, he's just paying himself qualified dividend income at the lower tax rate.

I missed this earlier, but wanted to also point out that Joe Billionaire is also making even more by taking out loans against his ginormous assets and putting that loan money to use in some way or another to personally profit even further. Never-ending money supply for these folks.

[JWags85]

I missed this earlier, but wanted to also point out that Joe Billionaire is also making even more by taking out loans against his ginormous assets and putting that loan money to use in some way or another to personally profit even further. Never-ending money supply for these folks.

Except that isn't some special billionaire tool.  Joe Schmoe does it all the time with second mortgages, cars as collateral for loans, etc...  Plenty of small businesses have been started and funded doing just that.  The last major financial crisis had a critical component of people over-leveraging their assets.  And sometimes millionaires and billionaires lose huge portions of their wealth by leveraging like that.

As I said, thought I'm pretty financially conservative, I have no issue with changing some of the borrowing rules against equity holdings.  I also dont have much of an issue with changing how dividend income is taxed.  But the idea of "this is ways that billionaires make money that normally people don't, lets attack that" rings hollow, when "normal" people have the ability and potentially the means, they just don't for whatever reason. 

[jesmu84]

Except that isn't some special billionaire tool.  Joe Schmoe does it all the time with second mortgages, cars as collateral for loans, etc...  Plenty of small businesses have been started and funded doing just that.  The last major financial crisis had a critical component of people over-leveraging their assets.  And sometimes millionaires and billionaires lose huge portions of their wealth by leveraging like that.

As I said, thought I'm pretty financially conservative, I have no issue with changing some of the borrowing rules against equity holdings.  I also dont have much of an issue with changing how dividend income is taxed.  But the idea of "this is ways that billionaires make money that normally people don't, lets attack that" rings hollow, when "normal" people have the ability and potentially the means, they just don't for whatever reason.

Joe Schmoe has access to the same thing, yes. But Joe Schmoe doesn't have the ability to lose 1 mil like it's nothing.

[JWags85]

Joe Schmoe has access to the same thing, yes. But Joe Schmoe doesn't have the ability to lose 1 mil like it's nothing.

I'm not sure what your point is?  Everyone has different risk abilities based on various factors.  I know multi-millionaires who have a coronary over their kids not paying off their credit card each month and potentially paying interest on like $1000 in balance.  I know a friend from college whose dad was over $500K in various leveraged investment debt and only owned 2 small retail stores as his base. 

Complaining that the wealthy can afford to take risks, in absolute dollar terms, that the less wealthy can't isn't any sort of compelling argument for changing the system.  Because they can lose $1MM from their $1B net worth like someone loses $500 from their $500K net worth proportionally, doing the same things.  Everyone looks at the ultra wealthy in contrast to the working poor, but always seem to overlook the countless middle class and upper middle class who have access to plenty of these "rich people" tricks but just don't use them.

[MU82]

Wags, I don't think most in America's middle class are as financially free to use those "tricks" as perhaps you do.

Could they use those tricks legally? Sure. Could some manage it based on their net worth, income, etc? Maybe some. But when you and your wife both work and bring in $80K, when you have less than $10K in the bank, when you have a kid getting ready to go to college, when you've already done a cash-out refi to pay for the new roof, when you're literally living paycheck to paycheck -- most of which describes LOTS (perhaps the majority of) middle-class families in the United States -- I don't think using those tricks is very realistic. Even if they could afford to use a trick or two, psychologically, it's the last thing they're thinking of.

Much of the above applies to upper-middle-class Americans, too, depending upon how one defines that category.

[JWags85]

Wags, I don't think most in America's middle class are as financially free to use those "tricks" as perhaps you do.

Could they use those tricks legally? Sure. Could some manage it based on their net worth, income, etc? Maybe some. But when you and your wife both work and bring in $80K, when you have less than $10K in the bank, when you have a kid getting ready to go to college, when you've already done a cash-out refi to pay for the new roof, when you're literally living paycheck to paycheck -- most of which describes LOTS (perhaps the majority of) middle-class families in the United States -- I don't think using those tricks is very realistic. Even if they could afford to use a trick or two, psychologically, it's the last thing they're thinking of.

Much of the above applies to upper-middle-class Americans, too, depending upon how one defines that category.

But again, the situation you described is not justification for changing the system, IMO.  Those people you described can't afford a luxury SUV.  Or a $60K sedan.  So should we outlaw car financing for "expensive" cars over a certain price?

Things that are fundamentally unfair or broken I can be fine with changing, but in terms of "well people with lots of money can do this, others cant" that rings hollow for me.  Cause sure, not in that example you presented (won't even get into living paycheck to paycheck on $160K income), but there are plenty of families bringing in $200K a year that could, but don't.  And they are hardly the same as a billionaire.

[MU82]

But again, the situation you described is not justification for changing the system, IMO.  Those people you described can't afford a luxury SUV.  Or a $60K sedan.  So should we outlaw car financing for "expensive" cars over a certain price?

Things that are fundamentally unfair or broken I can be fine with changing, but in terms of "well people with lots of money can do this, others cant" that rings hollow for me.  Cause sure, not in that example you presented (won't even get into living paycheck to paycheck on $160K income), but there are plenty of families bringing in $200K a year that could, but don't.  And they are hardly the same as a billionaire.

I was talking about $80K total. Again, they might have "access" to those tricks you talk about, but they simply can't use them.

Otherwise, I don't disagree with much of what you say. And I think we both can agree that billionaires and hundred-millionaires are easy targets for politicians the same way "evil drug companies" are.

This truly is an issue I see both sides of. And, as I said, while I'm not advocating for this tax, I wouldn't shed many tears if it happens.

[MuggsyB]

I don't think the unrealized cap gains tax makes any sense unless I'm missing something.  Because it impacts way more than the super wealthy.  It could also lead the super wealthy to move their companies or be out of the market.

Suppose you're not particularly wealthy and bought a house 25 yrs ago for 100K.  You are still the present owner and today it's worth 1 mill.  Would you have to pay the unrealized capital gains taxes on the home while you are still living in it?  Or if you pass it onto family would they have to pay annual ucg taxes?   The average person could not afford to pay these taxes very long.

[MU82]

I don't think the unrealized cap gains tax makes any sense unless I'm missing something.  Because it impacts way more than the super wealthy.  It could also lead the super wealthy to move their companies or be out of the market.

Suppose you're not particularly wealthy and bought a house 25 yrs ago for 100K.  You are still the present owner and today it's worth 1 mill.  Would you have to pay the unrealized capital gains taxes on the home while you are still living in it?  Or if you pass it onto family would they have to pay annual ucg taxes?   The average person could not afford to pay these taxes very long.

As I read what few details have been made available in the proposed legislation, it would not affect this hypothetical homeowner of yours.

[ATL MU Warrior]

I don't think the unrealized cap gains tax makes any sense unless I'm missing something.  Because it impacts way more than the super wealthy.  It could also lead the super wealthy to move their companies or be out of the market.

Suppose you're not particularly wealthy and bought a house 25 yrs ago for 100K.  You are still the present owner and today it's worth 1 mill.  Would you have to pay the unrealized capital gains taxes on the home while you are still living in it?  Or if you pass it onto family would they have to pay annual ucg taxes?   The average person could not afford to pay these taxes very long.

I have admittedly not kept up with this, but I believe the proposal was only on investments (not real estate) and only kicks in at very high income levels, so your concern for the “average person” might be misplaced.

[MU82]

Merck (MRK) up big today on news of its COVID-19 drug success. Up 10% as I write this.

I had bought some MRK over the last few months as a value/income play, so this is a very nice surprise. As always, wish I had bought more!

[MuggsyB]

Well, maybe I'm mistaken.  But wouldn't it disincentive people to have their money in the market?  Unless you are reimbursed on unrealized capital losses or don't pay long term cap gains when you sell?  Wouldn't it force billionaires to have way more of their net worth in cash to pay these taxes?

[MU82]

Well, maybe I'm mistaken.  But wouldn't it disincentive people to have their money in the market?  Unless you are reimbursed on unrealized capital losses or don't pay long term cap gains when you sell?  Wouldn't it force billionaires to have way more of their net worth in cash to pay these taxes?

People with money invest in the market. It is the best place to get rich/richer.

They own a zillion other things, too.

I think you're worrying way too much about this, Muggs.

[Tortuga94]

Well, maybe I'm mistaken.  But wouldn't it disincentive people to have their money in the market?  Unless you are reimbursed on unrealized capital losses or don't pay long term cap gains when you sell?  Wouldn't it force billionaires to have way more of their net worth in cash to pay these taxes?

Taxing unrealized gains on a yearly basis is not going to happen, just something being proposed by some on the far left but no republican or even moderate dems will support that.

Even if they did start taxing unrealized gains, if interest rates remain where they are now, why would anyone leave their money in cash? To earn zero and lose to inflation? Unless interest rates go up substantially, people with means will continue to invest in assets that can appreciate over time and outpace inflation. If they have gains and are being taxed, they would likely sell those assets to raise the cash to pay the tax. Either way if they made 10% and lose half to taxes, doesn't a net 5% still beat zero?

From my understanding, here are some of the proposals the Biden administraion has put out there:

1) Raising the top marginal rate back to 39.6 from the current 37 percent. This is happening regardless in 2025 as that is when the Trump tax cuts are expiring, which increases everyone's marginal tax rates, not just those above $400K. Under this proposal the higher marginal rates would apply to incomes over 452,700 for single filers, 481,000 for head of household and 509,300 for joint filers. Those numbers would then be indexed for inflation in future years.

2) Tax long-term capital gains as ordinary income for people with an AGI above 1 million, resulting in a top marginal rate of 43.4 when including the 3.8 percent Net Investment Income Tax.

3) Tax unrealized capital gains at death for unrealized gains over 1 million(2 million for joint filers)

4) Keep the capital gains exclusion of $250K/$500K for primary residence.

5) Limit like kind 1031 exchanges above $500K in capital gains

We'll see where they finally settle out, one thing is for sure tax rates will be higher in the future.

[Hards Alumni]

Taxing unrealized gains on a yearly basis is not going to happen, just something being proposed by some on the far left but no republican or even moderate dems will support that.

Even if they did start taxing unrealized gains, if interest rates remain where they are now, why would anyone leave their money in cash? To earn zero and lose to inflation? Unless interest rates go up substantially, people with means will continue to invest in assets that can appreciate over time and outpace inflation. If they have gains and are being taxed, they would likely sell those assets to raise the cash to pay the tax. Either way if they made 10% and lose half to taxes, doesn't a net 5% still beat zero?

From my understanding, here are some of the proposals the Biden administraion has put out there:

1) Raising the top marginal rate back to 39.6 from the current 37 percent. This is happening regardless in 2025 as that is when the Trump tax cuts are expiring, which increases everyone's marginal tax rates, not just those above $400K. Under this proposal the higher marginal rates would apply to incomes over 452,700 for single filers, 481,000 for head of household and 509,300 for joint filers. Those numbers would then be indexed for inflation in future years.

2) Tax long-term capital gains as ordinary income for people with an AGI above 1 million, resulting in a top marginal rate of 43.4 when including the 3.8 percent Net Investment Income Tax.

3) Tax unrealized capital gains at death for unrealized gains over 1 million(2 million for joint filers)

4) Keep the capital gains exclusion of $250K/$500K for primary residence.

5) Limit like kind 1031 exchanges above $500K in capital gains

We'll see where they finally settle out, one thing is for sure tax rates will be higher in the future.

Good info, appreciated.