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Oh, I'm sure he knew it. A couple of days after the State of the
Union address, the paper (forget if it was the Nashua Telegraph or the Boston
Globe) ran an article comparing the things he said versus what reality is.
One of the examples was the luxury tax on boats. Sure, Bush announced that
he'd like to see that rolled back. That part of the proposed budget, however,
also removes the exemption that keeps boat owners from paying the taxes on
their diesel fuel. So sure, its cheaper to buy the boat and it makes for
great PR, but the boat owners (at least those that own diesel engines) will
have to pay more in operational expenses instead. The article cited a lobster
fisherman who will get hit for another $1,000 a year in expenses and he already
owns his boat! Bush didn't trumpet the negatives about that, so why should we
expect him to broadcast the negative sides of the capital gains cut on
national television? (Incidently, I'm not arguing that it is proper that the
diesel fuel currently contains no federal taxes, just using it as an example
of a balancing change that was "forgotten" in the SOTU address.)
Oh, another one I loved is the extra $500/year deduction per child.
As its written in the budget, that law would take effect October 1, 1992
and thus for the 1992 tax year, you'd only get an extra $125 deduction per
child since the rule was only in effect for 1/4 of the year. But don't
worry, the elections will be over before people do their 1992 tax returns
and see that they aren't getting back the announced "$280 for a family with
two children in the 28% bracket..."
-craig
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Turns out capital gains tax cut is for most an increase. New details
come out all the time. The last was that any exempted capgains were to
be added back to modified adjusted gross income for purposes of
calculating alternative minimum tax. Now here's an example from today's
Barrons showing what happens when you depreciated..
You bought a rental duplex years ago and noe stand to realise a
$100K gain at resale. During course of ownership you wrote off
90K in deprecation. Under current law you'd face 28% in fed tax or 28K
on the 100K gain.
Under Bush plan, assuming you're in 31% tax bracket, you'd be hit with
$27.9K tax in depreciation recapture (90K * 0.31) plus $1.54K on your
10k remaining capgain at 15.4%. Your tax burden woud be $1,440 higher
than current law.
But that's not as bad as it gets. Dem leaders in the house agreed to
push for 35% top bracket for ordinary income. Your exposure under a
combined Bush-Democratic "reform" capgains package could be a full 25%
higher tax (35% versus 28%) than today.
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Yes indeed, I have encountered recaptured depreciation a few times in
my yearly report to Uncle Sam. The proposed law represents a modification
to recapture rules. Right now recapture is at the 28% capital gains ceiling
rate. Moreover recapture in new rules would not be limited to
accelerated depreciation in excess of straight line. It would apply to
all depreciation. The real point is, for most investors, this is not a
capital gains reduction to 15.4%. Given that maximum rate of 28%
currently applies to capital gains of all kinds, including depreciation
recapture, the expectation was that the 15.4% would apply to capgains
in the same way. And of course there's still no indexing of capgains.
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