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% 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 -- 0% -- took effect for investors in the 10% and 15% income tax brackets.
Previously these taxpayers had to pay Uncle Sam 5% of their long-term capital gains.
Now any long-term assets they sell will be exempt from capital gains taxes.
0% capital gains tax rate for 2015 taxes applies to
|Filing status||Maximum taxable income|
|Single or married filing separately||$37,450|
|Married filing jointly||$74,900|
|Head of household||$50,200|
To qualify for the 0% 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 2015 and 2016) with this capital gains break and give appreciated long-term assets to their older parents.
20% tax rate for high earners
When capital gains tax rates were lowered under the Bush administration, the top rate was dropped to 15%. ATRA, however, bumped the investment tax rate up for higher earners.
Now wealthier taxpayers will pay a maximum 20% tax on long-term capital gains. That 20% tax also applies to qualified dividends. This higher rate applies when your adjusted gross income falls into the top 39.6% tax bracket.
20% capital gains, dividends tax rate for 2015 returns
- Single filers with adjusted gross income of $413,201 or more
- Head of households with adjusted gross income of $439,001 or more
- Married joint filers with adjusted gross income of $464,851 or more
15% tax rate for most
Tax-law changes in May 2003 lowered the top capital gains tax rate to 15%. This tax rate cut remains under ATRA for investors whose adjusted gross income is less than the thresholds for the top 20% rate.
The 15% rate also applies to some dividends that stocks and mutual funds pay account holders.
Remember, these rates are for long-term capital gains. In most cases, that means you have to hold an asset for more than a year before you sell it. If you cash it in sooner, you'll be taxed at the short-term rate, which is the same as your ordinary income tax level and could be as high as 39.6%.
25% capital gains rate
While the lower capital gains rates for individual investors have received the most attention, at least on Capitol Hill, for the past few years there have been a couple of other categories of capital gains taxes.
A rate of 25% applies to part of the gain from selling real estate you depreciated. Basically this keeps you from getting a double tax break. The IRS first wants to recapture some of the tax breaks you've been getting via depreciation throughout the years. You'll have to complete the worksheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, known as Section 1250 property. More details on this type of holding and its taxation are available in IRS Publication 544, Sales and Other Dispositions of Assets.
28% capital gains rate
Two categories of capital gains are subject to this rate: small-business stock and collectibles.
If you realized a gain from qualified small-business stock that you held more than 5 years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28% rate. If you've already hired a tax professional to help you sort out the 25% rate on depreciable property, she can help you figure this tax, too. Or you can get the specifics on gains on qualified small-business stock in IRS Publication 550, Investment Income and Expenses.
If your gains came from collectibles rather than a business sale, you'll still pay the 28% rate. This includes proceeds from the sale of a work of art, antiques, gems, stamps, coins, precious metals and even pricey wine or brandy collections.