A look at capital gains tax rates

Taxes » Investment Taxes » A Look At The Many Capital Gains Rates

Money gurus are always preaching long-term investing. Not only will that give you a better shot at earning more, it'll also get you a lower tax rate when you sell.

But exactly what rate you pay depends on your income.

The American Taxpayer Relief Act of 2012, or ATRA, enacted Jan. 2, 2013, made some popular capital gains tax laws permanent. That means investors won't have to worry about trying to plan while facing possible changing tax laws.

ATRA also increased the top tax rate on long-term capital gains and certain dividend payments to 20 percent for high-income earners. This is 5 percent higher than the laws under the George W. Bush administration.

However, if you make less than those amounts for your filing status, the maximum capital gains and dividends tax rates continue at 15 percent.

And some taxpayers in the two lowest tax brackets could end up without any capital gains tax bill. That's right; zero capital gains for some filers.

One thing all these tax levels do have in common is that they are known as long-term capital gains. This means they apply to assets that you hold for at least 366 days -- more than one year.

The tax appeal of the long-term capital gains tax rate is that it is generally much lower than what you pay on your regular income. Under ATRA, that could be as high as 39.6 percent for wealthier taxpayers. In fact, it is a taxpayer's income level that generally determines which capital gains rate applies. If your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates. And, you could face yet another rate depending on the type of property you sell.

Zero capital gains taxes for some

On Jan. 1, 2008, the best of all possible tax rates -- zero percent -- took effect for investors in the 10 percent and 15 percent income tax brackets.

Previously these taxpayers had to pay Uncle Sam 5 percent of their long-term capital gains. Now any long-term assets they sell will be exempt from capital gains taxes.

Zero percent capital gains tax rate for 2014 taxes applies to

Filing statusMaximum taxable income
Single or married filing separately$36,900
Married filing jointly$73,800
Head of household$49,400

To qualify for the zero rate, you must own the asset for more than one year before you sell it.

While lower-income individuals aren't typical investors, this tax benefit could help out folks such as retirees who have little or no taxable income. And the children of older individuals could combine the annual gift exclusion ($14,000 in 2014 and 2015) with this capital gains break and give appreciated long-term assets to their older parents.

20 percent tax rate for high earners

When capital gains tax rates were lowered under the Bush administration, the top rate was dropped to 15 percent. ATRA, however, bumped the investment tax rate up for higher earners.

Now wealthier taxpayers will pay a maximum 20 percent tax on long-term capital gains. That 20 percent tax also applies to qualified dividends. This higher rate applies when your adjusted gross income falls into the top 39.6 percent tax bracket.

20 percent capital gains, dividends tax rate for 2014 returns

  • Single filers with adjusted gross income of $406,751 or more
  • Head of households with adjusted gross income of $432,201 or more
  • Married joint filers with adjusted gross income of $457,601 or more

15 percent tax rate for most

Tax-law changes in May 2003 lowered the top capital gains tax rate to 15 percent. This tax rate cut remains under ATRA for investors whose adjusted gross income is less than the thresholds for the top 20 percent rate.


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