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LoadingSomething is loading. Thanks for signing up! Access your favorite topics in a personalized feed while you're on the go. Capital gains are profits. Specifically, the profits you make from selling capital assets, such as stocks, bonds, real estate, and other investments and collectibles. When you sell a capital asset at a price higher than its "basis," you're generally required to report a capital gain on your federal income tax return. Basis means the asset's purchase price, plus any money you reinvested or put into improving it. The tax rate you'll pay on capital gains can be lower than the rate you'll pay on other types of income, such as salary or profit from a business. But the amount you'll pay depends on how long you held onto the asset before selling it. Let's examine how the capital gains tax rate actually works for individuals. There are two capital gains tax rates, reflecting the two types of capital gains: short-term and long-term.
The clock begins ticking on the day after you buy the asset, up to and including the day you sell it. Short-term capital gains don't benefit from a special tax rateShort-term capital gains are taxed at ordinary income tax rates, up to 37%. The rate you'll pay depends on your filing status and total taxable income for the year. 2022 federal income tax bracketsSource: IRS To illustrate, say you are a single taxpayer in 2022 with wages of $85,000, short-term capital gains of $10,000, and claim the standard deduction ($12,950). Your taxable income is $82,050 ($85,000 + $10,000 - $12,950), putting you in the 22% tax bracket for 2022. However, you don't pay 22% on all your income, only income over $41,775 (the top of the 12% tax bracket). You calculate your tax as follows:
For your 2022 tax return (filed in 2023), your tax bill is roughly $13,669. Long-term capital gains are taxed at preferential ratesIf you manage to hold onto your investment for more than one year (365 days), you can benefit from a reduced tax rate on your capital gains. Long-term capital gains are taxed at preferential rates, up to 20%. The rate you'll pay depends on your filing status and total taxable income for the year. How capital gains are taxed depends on your total incomeReturning to the earlier example, say your $10,000 capital gain qualified for long-term treatment. Your total taxable income is still $82,600. However, your tax calculation is different. Your ordinary income is $72,050 ($85,000 of wages less your $12,950 standard deduction). You are still in the 22% tax bracket, and calculate your ordinary income tax as follows:
For long-term capital gains, you fall into the 15% tax bracket, so you calculate your long-term capital gains tax as 15% of $10,000: $1,500. For 2022, your tax bill is roughly $12,969. Having your capital gain taxed at long-term rather than short-term rates results in $700 of tax savings. The net investment income tax on capital gainsCapital gains taxes aren't the only ones investors have to worry about, though. The net investment income tax (NIIT) is a separate tax, but it can have an impact the tax you pay on capital gains as well as other types of investment income. The NIIT imposes a 3.8% tax on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds a certain amount. Investment income includes:
The total of your investment income is reduced by any deductions related to investments, such as investment interest expense and expenses related to rental property or royalties, to arrive at net investment income. The NIIT only applies if your MAGI exceeds the threshold amount for your filing status. Those thresholds for 2022 are:
If your income exceeds the threshold, you calculate NIIT on Form 8960 and file it along with your Form 1040 tax return. How to avoid capital gains taxThere are several ways to minimize or even avoid capital gains taxes. 1. Hold on to assets for more than one yearWhenever possible, hold onto your investments for more than a year, so they qualify for long-term capital gains rates. 2. Invest in tax-advantaged accountsTax-advantaged accounts, such as IRAs and 401(k)s, allow your investments to grow on a tax-deferred or even tax-free basis. You don't have to pay capital gains on any sales within these accounts in the year they occur. With a traditional IRA or 401(k), you'll pay taxes when you take distributions from the account. No tax is due on Roth IRA distributions, as long as you've followed the withdrawal rules. 3. Take advantage of the home sale exclusionWhen you sell your home, you get to exclude a certain amount of profit from the sale from your taxable income. That limit is $250,000 for single filers and $500,000 for married couples filing jointly. To qualify, you must have owned the home and used it as your primary residence for at least two of the last five years. You can take advantage of this exclusion once every two years. 4. Use capital losses to offset capital gainsWhen to sell a capital asset for less than your basis, you have a capital loss. You can use those losses to offset capital gains. If your capital losses are greater than your capital gains, you can use up to $3,000 to offset ordinary income. Any remaining losses can be carried forward and used to offset capital gains in future tax years. 5. Donate appreciated assetsFeeling philanthropic? Rather than selling stock, paying taxes on the capital gains, and then donating cash to your favorite charity, consider donating the stock directly to the organization. This strategy can reduce your tax bill in two ways. First, you can avoid the capital gains tax you would have owed if you sold the stock. Second, if you itemize deductions, you can claim a charitable deduction for the donated stock's fair market value. The bottom lineTaxes shouldn't be your sole concern when deciding when and where to invest. However, knowing how capital gains are taxed and taking advantage of a few tax-saving strategies can help you reduce the bite of capital gains tax and keep more investment profits in your pocket. Consult with a financial or tax professional who can help you manage your investments and make a plan for selling appreciated assets in a way that makes the most sense for you. Related articlesMore... What are capital gains tax rates for 2022?Capital Gain Tax Rates
The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).
Is capital gains added to your total income and puts you in higher tax bracket?Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. A capital gain is realized when a capital asset is sold or exchanged at a price higher than its basis. Basis is an asset's purchase price, plus commissions and the cost of improvements less depreciation.
What is the income tax rate on longIndividuals are not liable to earn any tax deduction under Section 80C to 80U from long-term capital gains tax in India. The entire profited amount will qualify for taxable income and will be charged a flat 20% tax under long-term capital gain.
How do you calculate longHow to Calculate Long-Term Capital Gains Tax. Determine your basis. The basis is generally the purchase price plus any commissions or fees you paid. ... . Determine your realized amount. ... . Subtract the basis (what you paid) from the realized amount (what you sold it for) to determine the difference. ... . Determine your tax.. |