MONEY Social Security

How Social Security Spousal Benefits Can Boost Your Tax Bill

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: If my wife takes the “spousal benefit” on my Social Security, which I have suspended until age 70, do we have pay taxes on that income? – Ron

A: Yep, you do. Social Security benefits are taxable if they exceed certain levels, and this applies to spousal and other benefits as well as your own retirement benefits. The rules can be a bit tricky. If you file a joint tax return, and your “combined” income is less than $32,000, you will owe no federal income tax on your Social Security benefits. If it’s between $32,000 and $44,000 a year, you will owe taxes on 50% of your benefits. Above $44,000, you would owe taxes on 85% of your benefits. Under current rules, you will never owe federal taxes on more than 85% of your benefits. These income brackets are not adjusted for inflation each year, so over time more and more people will owe taxes on their Social Security benefits. To determine your combined income as defined by Social Security, take your adjusted gross income (AGI) from your tax return, add any nontaxable interest you receive (from, say, a municipal bond), and then add half of your household’s combined Social Security benefits.

Q: After reading your article in Money, I thought the Start-Stop-Start strategy might work for me. I have called Social Security and they have never heard of this. Can you tell me the part of their regs which allows this method of claiming benefits? Thanks. —Phil

A: Start-Stop-Start is not an official name but a short-hand reference to a way of using Social Security’s rules for Suspending Retirement Benefits. If you have begun receiving benefits (the first Start), these rules permit you to suspend them (the Stop part) when you’ve reached your Full Retirement Age. Then, they will increase due to Delayed Retirement Credits until you resume them (the second Start part). Your suspended benefits will reach their maximum amount at age 70.

Q: My wife and I are both high earners. I am 68 now and am not taking Social Security benefits. My wife will be 66 in June 2017. Can I file for benefits and suspend and if I do, can she then receive half of my benefits now, even though she is not yet 66? What effect will this have on her own benefits, which she would like to defer until age 70? — Rao

A: If your wife files for a spousal benefit before she reaches 66 (which is defined as Full Retirement Age) she will not be able to file just for her spousal benefit. Under Social Security’s “deeming” rules, she will not be able to suspend her own benefits but will be required to file for them and her spousal benefit at the same time. She will not get both benefits but an amount that is roughly equal to the greater of the two. Also, because she is filing before her FRA, her benefits will be hit with Early Claiming Reductions, meaning that she will get an amount that is roughly equal to the greater of two reduced benefits! Unless you are in dire financial straits or facing a health or other family emergency, she should wait to file for a spousal benefit until she is 66. At that time, and assuming you have filed for and suspended your own benefit, she can file what’s called a restricted application for just her own spousal benefit. She will receive the full value of this benefit, which will equal half of your benefit as of your FRA. And she will be able to let her own retirement benefits increase by 8 percent a year until up to age 70.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How to Time Medicare and Social Security Claims for 2016

MONEY College tip of the day

Do You Have to Pay Taxes on College Scholarships?

stacks of textbooks on shelves
Rostislav Sedlacek—Getty Images/iStockphoto

Not if you and your scholarship meet these conditions.

Given the cost of college today, any assistance helps. And, fortunately, when the assistance comes in the form of a scholarship, there’s an added bonus: It’s usually not considered taxable income.

For a scholarship to be tax-free, it needs to meet a few conditions, however. Among the key ones:

  1. You must be a degree candidate at an eligible educational institution. That’s defined by the IRS as “one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.” In other words, most real colleges.
  1. The money must go toward what the IRS calls “qualified education expenses,” such as tuition, mandatory fees, and required books and supplies. Room and board doesn’t qualify. Nor does travel.

If part of the scholarship involves payment for services, such as teaching or research, that portion is generally considered taxable. The scholarship provider should send you with a W-2 form around tax time each year, showing the amount that represents taxable compensation.

The IRS explains all these rules and a few exceptions in Publication 970.

For more advice on paying for college, and to create a customizable list of colleges based on criteria such as size, selectivity, and affordability, visit the new MONEY College Planner.

MONEY Taxes

What Happens If I Overcontribute to My Retirement Account?

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20407.000000—Getty Images

Act fast to fix the mistake or you'll pay a hefty tax penalty.

Using a 401(k) or an IRA can be a powerful, tax-advantaged way to save for retirement, because your investment grows tax-deferred, and the contributions you make now can help reduce your taxable income.

But the tax advantages are limited through caps on how much you can contribute to these accounts.

For 2015, the contribution limits are $18,000 for a 401(k) (plus an extra $6,000 in catch-up contributions if you’re 50 or older) and $5,500 for IRAs (plus another $1,000 for those 50 and older).

Congress may set the limits, but generally, investors are responsible for sticking to them. So if you contribute more than the allowed amount in a given tax year, you potentially face IRS penalties and double taxation on your contributions.

Why So Many People Ask This Question: This is a more common issue for people who have IRAs because many employers have systems in place to prevent you from going over the 401(k) limit.

However, it is possible to overcontribute to a 401(k) if you change jobs and fail to inform your new employer of how much you contributed to your old 401(k) plan.

For IRAs, the onus is definitely greater on the individual to keep track of their contributions—and it can be easy for people to forget that they made a big contribution early in the year and then make a similarly large one later.

People who automate their IRA contributions might also miscalculate how much they are funneling into their account, only to find they’ve exceeded the limit at the end of the year.

What I Tell Them: If you contribute too much to a 401(k), the only way to correct the mistake is to have the plan administrator refund your extra contributions—known as excess deferrals—as well as any earnings on that money by the tax-filing deadline.

For excess deferrals made in 2015, the deadline is April 18, 2016, because of a federal holiday being observed on April 15.

Your excess deferral will then be reported as income in the year the contribution was made, while the earnings—or losses—will count toward your income in the year youreceived the refund.

So say you overcontributed $2,000 in 2015 and got your $2,100 refund in March 2016. The $2,000 would count toward your 2015 income, but the $100 in earnings would count toward your 2016 income.

What happens if you fail to meet the excess deferrals tax-filing deadline?

You will have to not only report your excess deferral as income for the year you made the contribution, but also pay taxes on it in the year you finally withdraw it. In other words, you’ll get taxed twice on the same contribution.

For overcontributions to IRAs, you must also withdraw the excess contribution, plus earnings, by the same tax-filing deadline as for 401(k)s.

But if you discover the mistake only after you’ve already filed your tax return, you have two options.

Within the next six months, you can file an amended return—with the excess contribution, plus earnings, removed—by the filing-extension deadline of October 17, 2016.

Or you can leave the excess contributions in your IRA in order to carry them over toward next year’s contribution limit—making sure, of course, to lower your ongoing IRA contributions to make room for the excess. However, you’ll have to pay a 6% penalty (via Form 5329) per year on that excess until it’s been absorbed or rectified.

The Bottom Line: While it doesn’t seem like it should be difficult to correct an honest error, the reality is that overcontributing to your retirement accounts can wreak tax havoc if you don’t act fast.

So once your realize your mistake, arrange to withdraw the excess contributions, and make sure you understand the tax implications on those withdrawals—ideally with the help of a tax professional.”

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

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MONEY financial literacy

6 Nuggets of Financial Wisdom I Wish I’d Learned in School (But Didn’t)

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JGI/Jamie Grill—Getty Images

Financial literacy 101 should be a required class.

As I reflect back on my years in high school and even college, one thing has become readily apparent: learning about the many facets of financial management wasn’t part of the plan.

Admittedly, the constraints on the education system these days are tremendous. Veritably every parent has an idea of what their child should be learning in school. But, when push comes to shove, America’s kids are woefully unprepared for the real world when they graduate with respect to their financial knowledge.

A financial literacy survey conducted by the Financial Industry Regulation Authority, or FINRA, that was released last year demonstrates just how much trouble our nation’s young adults could be in when it comes to their finances. The five-question survey covered relatively basic topics such as interest, savings, and investments. A passing score was considered four or five questions out of five answered correctly. Less than a quarter of millennials aged 18 to 34 passed the quiz.

Arguably a lot of these issues could be solved if they taught basic life skills in school as it relates to our everyday finances. Here are six things that I should have learned when I was in school, but didn’t until after I graduated and sought the answers out for myself.

1. How to balance a budget
In terms of basic money management skills, nothing is more critical than understanding your cash flow. Most people have a pretty good bead on how much money is coming in via paychecks, but when you ask them where their money went by the end of the pay period you’re liable to get a shoulder shrug.

Students in school should be taught early and often about the basics of keeping a record of their financial transactions. This means recording cash flow into and out of a checking account, and understanding how to properly formulate a budget. Operating on a budget will teach critical money management skills that should allow students to save money and not live paycheck to paycheck — something that could come in handy if they graduate with student loan debt or don’t land their dream job right out of high school or college.

2. How to manage credit
Another financial nugget of wisdom not being taught in schools is the concept of credit, credit scores, and how lending rates can affect our financial decisions.

Not understanding your credit score, or what goes into the makings of a credit score, can be a big problem. In general, your credit score is the single most important component that will determine whether or not a financial institution will lend to you. It’s also a determinant of what interest rate you’ll qualify for. The higher your credit score, the more favorable the lending rate, and the more financial institutions are likely to compete to obtain your business (which could further lower your lending rate).

Along those same lines, it’s imperative today’s youth understand the concept of interest and how dangerous making minimum payments on a credit card can be. According to a 2011 Harvard study by Dennis Campbell that looked at Affinity Plus Federal Credit Union’s 30,000+ member portfolio of credit card holders, a mere 8% of members were on track to pay off their credit cards in 36 months (three years) or less. This means more than nine out of 10 cardholders are in danger of paying substantial interest fees over the life of their debt.

3. How to invest for retirement
It’s not only important that schools teach kids how to save and manage their credit profile, but it’s equally important that they teach students how to invest for their future.

A Money Pulse survey from Bankrate in April showed that, for adults under the age of 30, only 26% owned stock. That might not seem like a terrifying figure, but with time and compounding being the best friend of the long-term investor, it could really put millennials in a tough bind come retirement. The reason is the stock market has historically returned 7% per year. Comparatively, next to bonds, CDs, money market accounts, savings accounts, and metals, it’s been the greatest long-term creator of wealth. Other investment vehicles may not even outpace the rate of inflation, resulting in real money losses.

On top of understanding their basic investment options, students should also be introduced to common tax-advantaged retirement vehicles like IRAs and 401(k)s, and they should leave school with a basic understanding of what Social Security and Medicare cover and how these entitlement programs could affect them before and after retirement.

4. How taxes affect us
Who here remembers getting their first paycheck and feeling dumbfounded at all the deductions that were taken out? I (vaguely) remember I did because I wasn’t taught about the basics of taxes — why we pay them and who benefits from our tax payments — in school.

Since all working Americans pay taxes, all students should be taught some tax basics. They should understand how much we pay in payroll taxes, and ultimately how those payroll taxes get funneled into the Social Security program. Students should also understand why federal income taxes, state income taxes, and Medicare taxes exist, and be prepared to estimate how much of their paycheck may wind up being taken out to cover taxes. Understanding how much you’ll pay annually, monthly, or weekly in taxes is another component to proper budgeting.

5. How to market yourself and interview for a job
I’m not exactly sure how schools get away without teaching this, but at no point during my tenure in high school and college was I ever taught the basics of developing a resume, how to market myself, or how to be interviewed by a prospective employer. In my opinion, these real-world situations should be at the top of the list of what we’re teaching in school.

Throughout high school we should be teaching students the skills necessary to land a well-paying job. These include how to prepare a resume and highlight their strengths, how to find and apply for a job, how to successfully interview and sell their strengths in person, and also how to negotiate contracts and/or their salary. Without these basic tools, millennials and generation Z could wind up being underpaid and/or underemployed.

6. How to set goals
Finally, schools need to do a better job of teaching students about goals and goal-setting.

Understandably goal-setting sometimes involves more than just your finances. Taking a European vacation, owning a beach house in Florida, or being married with two kids and a white picket fence by the age of 35, are all examples of potentially lofty goals. However, most goals will ultimately tie back into your finances. You need to be able to save enough in order to take a trip to Europe, buy a beach house, or start a family.

Schools these days should be teaching students about creating achievable goals for the short- and long-term, and should be advising students on how to hold themselves accountable. This means creating measurable goals that are easy to keep track of.

Although I personally believe these six financial nuggets of wisdom should be taught in our schools, there’s no reason kids these days shouldn’t also be learning about these concepts in their home. If you have the time and the know-how, there may be no greater gift you can give your child than giving them a head start in understanding real-world financial concepts.

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MONEY groceries

Why It’s Better to Live Near Trader Joe’s Rather Than Whole Foods

Trader Joe's
Todd Bannor—Alamy

Has nothing to do with grocery prices or organic foods.

Trader Joe’s has been named America’s favorite supermarket in consumer surveys, rating particularly high in terms of service, atmosphere, prices, and cleanliness.

A new study from RealtyTrac shows another reason why Americans may like living near a Trader Joe’s: It’s great for property values, apparently.

Or maybe the folks at Trader Joe’s just have a great nose for neighborhoods that are about to boom, bringing in an influx of affluent consumers eager to snap up “two-buck Chuck” merlots and edamame hummus.

After sifting through data related to 1.7 million homes in 188 zip codes, RealtyTrac researchers found that homeowners who live in the same zip code as a Trader Joe’s have seen their property values increase 40% since they purchased. The appreciation rate for homes near Whole Foods, on the other hand, was 34%, which is the average value increase for all zip codes.

On average, homes that share a zip code with a Trader Joe’s are worth more than those near Whole Foods too—$592,339 versus $561,840, respectively. For that matter, having either or both of these supermarket options nearby is a sign that your town is pretty well off: The study found that the average value of homes across all zip codes was $262,068.

There is a downside to living in a Trader Joe’s town, and it’s the same downside as living in any area where property values are high. And that downside is that high taxes go hand in hand with pricey homes.

The average annual property tax bill for homeowners living in the same zip code as a Trader Joe’s was $8,536, compared to $5,382 for homes near Whole Foods, and an average of $3,239 nationwide.

But, hey, at least the wine is cheap.

Read next: 29 Ways to Save Hundreds on Groceries

MONEY politics

Huckabee and Carson Invoke Pimps and God in Fight Over Your Taxes

Former Arkansas Gov. Mike Huckabee pitched his “fair tax” proposal at Thursday night’s Republican presidential debate. Meanwhile, fellow candidate Dr. Ben Carson pushed for a 10% income tax.

Huckabee said the tax on consumption “is paid by everybody, including illegals, prostitutes, pimps, drug dealers, all the people that are freeloading off the system now.”

Carson, a retired neurosurgeon, favors a 10% income tax that would apply to income large or small. That system, he said, “is based on tithing, because I think God is a pretty fair guy.”

Participants in the debate, held in Cleveland and televised on Fox News, were Huckabee, Carson, New Jersey Gov. Chris Christie, real estate mogul Donald Trump, former Florida Gov. Jeb Bush, Wisconsin Gov. Scott Walker, Florida Sen. Marco Rubio, Kentucky Sen. Rand Paul, Texas Sen. Ted Cruz, and Ohio Gov. John Kasich.

MONEY Retirement

The Right Way to Lower Your Tax Bill on an Inherited IRA

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Getty Images

Q: My dad has a traditional IRA with non-deductible, after-tax contributions. He has to figure out the taxable and non-taxable portion of the distribution every time he withdraws money. I will inherit the IRA when he passes away. As the beneficiary, do I need to do the same thing when I take distributions? – Max Liu, West Hills, Calif.

A: Yes, you will have to do the same thing your father does or you’ll end up paying more taxes than necessary when you take the money out, says Jeffrey Levine, a CPA and IRA technical consultant at IRAHelp.com.

Here’s why: You can’t deduct your IRA contributions on your taxes if you already participate in an employer-sponsored retirement plan such as a 401(k) and earn more than $71,000 as an individual or $118,000 as a married couple. But you can still contribute up to $5,500 a year in 2015 ($6,500 if you’re 50 or older) to a non-deductible IRA.

When you fund a non-deductible IRA, as your dad has done, you have already paid income taxes on that money. Unfortunately, the onus is on you, the account holder, to show the IRS that the taxes have been paid. You do that by filing IRS form 8606 each year you make after-tax IRA contributions. (The institution where you keep your account won’t keep track.)

If you don’t, the IRS has no record that you ever paid taxes on money in your IRA. But even if you do the paperwork properly upfront, you must file form 8606 again when you take withdrawals to prove that you already ponied up to Uncle Sam.

Though many rules are different when you inherit an IRA (more on that later) vs. funding one yourself, in this case the process is very similar for IRA beneficiaries, says Levine.

When you inherit an IRA that holds after-tax contributions, you must also file Form 8606 to claim the non-taxable part of the distribution, even if your dad already did. If you don’t, you’ll essentially be paying taxes on money that’s already been taxed. It’s even more complicated if you also have your own IRA with after-tax funds. You have to file two 8606 forms, one for your own IRA and one for your inherited IRA, says Levine. But it’s worth the effort.

“Taxes are bad enough to start,” says Levine. “There’s no reason anyone should pay more than they should just because of poor record keeping.”

You might wonder why anyone would make contributions to an IRA when you can’t get a tax break and all that paperwork is involved. After all, even when people qualify for tax breaks, not a lot of money is flowing into IRAs on a regular basis. But making non-deductible contributions still has benefits. Your investment grows without the drag of taxes, and you don’t pay tax on earnings until you withdraw them.

Keep in mind that when you inherit an IRA, a lot is different from when you own an IRA that you opened yourself. You can’t contribute new money to an inherited IRA and you can’t roll it into another IRA. Unlike regular IRA holders, who don’t have to start taking distributions until after age 70½, you generally have to begin taking money from the account the year after you inherit it.

It’s not wise to withdraw the money all at once though, says Levine. “Many people take the money and run. But that money is immediately taxable, and the income could phase you out of other tax breaks.”

You can reduce the tax hit by taking money out over time. The IRS requires you to withdraw a minimum amount based on your age and the year you inherit the money. You can use a calculator like this one to figure out the annual minimum. If you don’t take at least that much, you’ll be hit with a penalty. Plus, the longer you keep money inside the IRA, the more you benefit from the tax-deferred growth, adds Levine.

This can be complicated stuff, so you may want to consult with a tax expert or financial adviser who has experience in this area.

It’s terrific that your father has been diligent about his record keeping and taxes. To make the most of his legacy, you’ll have to be too.

MONEY online shopping

It’ll Probably Be Years Before You’re Forced to Pay Online Sales Tax

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Martin Barraud—Getty Images

For that matter, you might never have to pay up.

Two separate bills working their way through Congress could theoretically close the loophole that allows consumers to skip out on paying sales tax on purchases from e-retailers located in different states. Even so, in all likelihood online shoppers won’t be forced into paying sales tax anytime soon.

Over the years, e-retailers and the consumers who shop online to avoid sales taxes have been accused of having a “free ride.” For the most part, the laws stipulate that online sellers must charge sales tax only when the merchant has a physical presence in the state where the purchase is taking place. The net result is that a consumer in state X might not have to automatically pay sales tax when he makes a purchase from an e-retailer based in state Y.

The scenario gives an unfair advantage to the e-retailer over local brick-and-mortar retailers, which obviously have to collect local sales tax. Consumers are supposed to keep track of their online purchases and pay the appropriate sales tax when filing their income taxes, but the number of individuals who do so is approximately … zero. (Well, it’s close to zero anyway.)

Amazon, all-powerful online entity that it is, has come under fire in particular for not universally collecting sales tax on purchases, and it has made agreements with states on a case-by-case basis to charge the appropriate taxes.

Even as the vast majority of Americans now pay sales tax on Amazon purchases regardless of where they live, there are still many e-retailers that aren’t required to collect sales tax on out-of-state purchases. If either the Remote Transaction Parity Act or the Marketplace Fairness Act of 2015 become law, this loophole would be closed and states could start requiring nearly all sellers to collect sales tax.

Yet, as InternetRetailer.com reported, it’s not looking likely that either of the bills will pass in the near future. What’s more, if and when either does manage to become law, in order to allow time for e-retailers to tweak their operations to be in line with new regulations, there will be a delay of at least 12 months before sellers will have to collect sales tax. E-retailers will also be given a reprieve from charging sales tax during the peak winter holiday shopping season in the first year after either bill becomes law.

The upshot for consumers is that even if one of these bills suddenly catches fire in Congress and surprisingly passes soon, “2017 would be the first holiday season it could take effect,” InternetRetailer.com states. Remember, that’s only if one of these bills passes. If neither does, then many online shoppers can continue enjoying their free ride indefinitely.

MONEY Taxes

Why Boston Refused to Host the 2024 Olympics

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Steve Dunwell—Getty Images

“I will not sign a document that puts one penny of taxpayers’ money on the line for Olympics cost overruns,” Boston Mayor Marty Walsh said.

Boston and the U.S. Olympic Committee jointly announced on Monday the ending of the city’s campaign to host the 2024 Olympic and Paralympic Games.

Earlier Monday, Boston mayor Marty Walsh said he would not put taxpayers at risk by signing a contract with the United States Olympic Committee and would drop the city’s bid to host the Summer Games in 2024 if required to sign on Monday.

“I will not sign a document that puts one penny of taxpayers’ money on the line for Olympics cost overruns,” Walsh said at a press conference on Monday.

Olympic organizers set a provision that requires the host city to cover any cost overruns in the lead-up to the Olympics. A $4.6 billion plan was released in late June as part of Boston’s revised bid, in which about half of the originally planned venues were changed or relocated.

Walsh also said he would have “no regrets” about Boston’s Olympic bid being pulled and that he had spoken with Massachusetts governor Charlie Baker about the possibility.

“As we reflected on the timing and the status of our bid in this international competition, we have jointly come to the conclusion that the extensive efforts required in Boston at this stage of the bid process would detract from the U.S.’ ability to compete against strong interest from cities like Rome, Paris, Budapest and Hamburg,” Boston 2024 partnership chairman Steve Pagliuca said in a release. “For this reason, we have jointly decided to withdraw Boston’s bid in order to give the Olympic movement in the United States the best chance to bring the Games back to our country in 2024. In doing so, Boston 2024 Partnership will offer our support and the extensive knowledge we have gained in developing our Bid 2.0 to any American city that may choose to participate in the 2024 bidding process going forward.”

The USOC has expressed interest in working closely with city and state leaders in an effort to help the U.S. secure hosting rights for the first time since the 2002 Salt Lake City Games. New York and Chicago failed in their attempts to secure the 2012 and 2016 Olympics, respectively.

Los Angeles, host of the 1932 and 1984 Games, may be ready to take the place of Boston as the USOC’s candidate city. National Olympic committees have until Sept. 15 to submit their candidate city selection to the International Olympic Committee.

“When Boston was selected in January of this year, we were excited about the possibility of partnering with Boston’s great universities in a bid that would take advantage of existing college facilities and spur the development of much-needed sport, transportation and residential infrastructure for the City of Boston,” USOC CEO Scott Blackmun said in a release. “The cornerstone idea behind Boston’s bid was sound. We want to compliment and thank Steve Pagliuca and his team at Boston 2024 for the remarkable work they have done in the last two months to transform a powerful idea into a fiscally responsible reality that would have benefited the City of Boston and America’s athletes for decades to come. Because of the good work of Boston 2024, we know that the Boston Games would have been good for Boston, just like the Olympic Games were good for Lake Placid, Los Angeles, Atlanta and Salt Lake City.

“When we made the decision to bid for the 2024 Olympic Games, one of the guiding principles that we adopted was that we would only submit a bid that we believed could win.”

This article originally appeared on Sports Illustrated.

MONEY 2016 Election

What Hillary Clinton’s New Tax Proposal Would Mean

U.S. Democratic presidential candidate Hillary Clinton speaks during an event at the New York University Leonard N. Stern School of Business in New York July 24, 2015.
Shannon Stapleton—Reuters U.S. Democratic presidential candidate Hillary Clinton speaks during an event at the New York University Leonard N. Stern School of Business in New York July 24, 2015.

Here's how the plan would change capital gains tax rates.

On Friday, Democratic Presidential hopeful Hillary Clinton spelled out her new plan to raise tax rates on capital gains — the profits people reap when they sell an asset a like stock, parcel of real estate or even a business.

The capital gains tax rate has been a political football for years, not least because rich people tend to own — and sell — the most stuff. Here are a few key things you need know about capital gains tax in general, and Clinton’s proposal specifically.

How are capital gains currently taxed?

While the tax rate on capital gains has bounced around a lot over the years, the big tax deal reached in the last hours of 2012 pushed up the top rate on long-term capital gains to 20% — still far lower than the 39.6% top rate on income (although top earners also pay a health-care related 3.8% surtax on investment income). For taxpayers in lower brackets, long-term capital gains tax rates max out at 15% or less.

There is an exclusion for profits of up to $250,000 ($500,000 if you are married) on your primary residence, so many homeowners won’t have to worry about a huge tax bill when they move.

That’s all for long-term capital gains, by the way. Short-term capital gains — that is, the profit made on stocks or other assets held less than a year — get taxed at the same rate as income.

Why do capital gains get a tax break?

In the relatively recent past, both Democratic (Bill Clinton) and Republican (George W. Bush) presidents have cut the capital gains rate in hopes that doing so would spur the economy. Since the capital gains tax is really a tax on investment, economists hope that lowering the tax will prompt people to invest more of their money rather than spend it.

The idea is that if more people are looking to invest, it should be easier for start-ups or existing companies that want to develop new products to find funding.

That’s also why short-term gains get taxed as income — because short-term gains benefit people who make their living buying stuff and then quickly reselling, rather than investing for the long term.

So what’s the problem?

In addition to spurring investment, a low long-term capital gains rate also spurs inequality. It’s not hard to see who the biggest beneficiaries are: people who invest in the stock market or who sell businesses that they own.

The low capital gains rate is one reason America’s 400 biggest earners paid a tax rate of less than 17% in 2012, the latest year for which the IRS has released data. There are also questions about whether the low capital gains rate really does boost the economy.

After all, while the economy took off under Bill Clinton, the stock market has also continued to soar since the most recent increase in the long-term gains rate.

What is Hillary Clinton proposing instead?

Hillary Clinton’s proposal would require wealthy taxpayers to hold their investments much longer to get the full long-term capital gains tax benefit. Instead of a single long-term gains rate that kicks in after one year, her plan would create a series of rates ranging from 36% to 24% for those who hold investments for at least two years but less than six years.

Clinton says she isn’t doing this simply to raise taxes on the rich. Rather it’s to discourage short-termism among big investors. That’s something even many on Wall Street regard as a problem, even if higher taxes might not be their preferred solution. So it looks like good politics.

Is it a good idea?

That, of course, depends on who you ask. Many progressives would simply like to see capital gains taxed as income.

Yet it’s not even clear whether Clinton’s proposal could actually change investor behavior — even if it could pass Congress. “My general impression is deep skepticism,” Leonard Burman, director of the nonpartisan think tank the Tax Policy Center told Reuters earlier this week. “Frankly, I don’t see the logic in trying to encourage people to hold assets for longer than they want to.”

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