A Taxing Issue
A Taxing Issue
Nobody likes paying taxes.
It’s a fact that has helped inspire and alter human behavior throughout history. You don’t have to look far to find ways taxes have affected human decision making. For example, taxes are the reason:
Brick size was standardized in Great Britain
Ironically, to pay for the war in the American colonies (which started because of taxes), Britain imposed a tax on bricks in 1784. Before the bricks were fired, and after the tax was paid, the bricks were imprinted with the word ‘excise,’ reported Wikipedia.1
Since the tax was assessed on every thousand bricks, brickmakers began making bricks larger to lower the amount of taxes owed. After a couple of decades, the government limited brick size and charged double the tax when bricks exceeded the size limit.1
Canal houses are tall and narrow in The Netherlands
The Netherlands has become known for its charming and narrow canal houses. The narrow design doesn’t reflect an architectural preference, it was a response to the tax system. In Holland, during the 1600s, the tax on canal houses was determined by the width of the façade, according to the Tax Foundation.2
In order to minimize tax exposure, Dutch property-owners built tall, narrow houses that tended to lean forward to maximize available interior. Homes usually featured large windows and had cranes attached to the gable so merchandise and other items could be lifted into place, reported Bloomberg City Lab.3
Men were clean shaven in Russia in the late 1600s
Tsar Peter the Great wanted his nation to westernize. He believed a clean-shaven face was a more modern look so, in 1698, he imposed a beard tax. With the exception of priests, men had to pay up to 100 rubles a year – an enormous sum – to keep their beards. Commoners paid a much smaller tax, reported the Smithsonian.4
Minimizing the tax meant shaving, which was a difficult decision since beards were an ingrained part of traditional culture. Those who chose to keep their beards paid the tax and received a token that read: The beard is a useless burden.4
Homes had a limited number of windows in Europe
From the 1600s through the 1800s, various countries in Europe assessed property taxes on windows. In mid-1700s England, homeowners who chose to have more than nine windows paid a 6 pence tax on their windows. (In England, the window tax was considered a better option than its predecessor, the hearth tax, which taxed fireplaces and stoves.) To minimize taxes, property owners camouflaged or, sometimes, bricked up windows.5
U.S. tax policy may soon change
The American Families Plan, which is currently being debated in Congress, includes changes that have the potential to affect capital gains and inheritance taxes. In its current iteration, the Plan would:
- Increase the capital gains tax rate. The Plan proposes raising the top long-term capital gains tax rate from 20 percent to 39.6 percent for individuals and households with $1 million or more in income, according to Rachel Louise Ensign of The Wall Street Journal.6
The change would affect about 2.7 percent of households and 62 percent of capital gains.6
There are a variety of ways for Americans with high incomes to possibly limit exposure to a potential capital gains tax increase, reported Randall Forsyth of Barron’s. They could:7
- Harvest capital gains today
- Take gains only when income is below $1 million
- Reduce taxable income by investing in tax-exempt rather than taxable bonds
- Reduce taxable income by donating appreciated assets
- Employ other income acceleration and deduction deferral strategies
An analysis of data from capital gains tax rate increases in 1987, 1988, and 2013, found the wealthiest Americans sold about 1 percent of their assets, according to a Goldman Sachs analysis cited by Steve Goldstein of MarketWatch.8
- Repeal the step-up in cost basis for inherited assets. When an investor purchases an asset, the price paid is its cost basis. If an asset appreciates in value and is then sold, the difference between the cost basis and the current market value is a capital gain. Alternatively, if an asset’s market value declines and is then sold, the difference in value is a capital loss.9
When assets are inherited, they receive a step-up in basis. In general, this means the value of an appreciated asset is reset and the current market value becomes the new owner’s cost basis. This can help minimize any capital gains tax owed on an inheritance.9
The proposed tax change would eliminate the step-up in basis for many types of inherited assets, reported Robert Frank of CNBC.10
Investors who wish to minimize their heirs’ potential tax bills may want to talk with their financial professional about insurance, gifting, and/or structured sale strategies.
If you would like to discuss how the proposed tax changes may affect you, please give us a call.
Sources:
1https://en.wikipedia.org/wiki/Brick_tax
2https://taxfoundation.org/the-weird-way-taxes-impact-behavior/
3https://www.bloomberg.com/news/articles/2020-01-15/the-history-of-amsterdam-s-canal-houses (or go to https://resources.carsongroup.com/hubfs/Source-Carson_Coaching/Jun_2021_Bloomberg-Why_Amsterdams_Canal_Houses_have_Endured_for_300_Years-Footnote_3.pdf)
4https://www.smithsonianmag.com/smart-news/why-tsar-peter-great-established-beard-tax-180964693/
5https://www.lincolninst.edu/publications/articles/window-tax
6https://www.wsj.com/articles/bidens-capital-gains-tax-increases-would-hit-few-americans-study-says-11620207001 (or go to https://resources.carsongroup.com/hubfs/Source-Carson_Coaching/Jun_2021_WSJ-Bidens_Capital-Gains_Tax_Increases_Would_Hit_Few_Americans_Study_Says-Footnote_6.pdf)
9https://www.finra.org/investors/insights/tax-time-topics-cost-basis-what-you-need-know
Disclosures
Securities offered through LPL Financial, Member FINRA/SIPC.
This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.
This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific situation with a qualified tax professional.
