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A buy-and-hold investment strategy often pays off for long-term investors when it comes time to sell their assets.
If you’ve made money on the asset and have held it for longer than a year before selling, you can pay a lower tax rate — if you have to pay any tax at all — because your gain is considered a long-term capital gain. But if you sell before a year is up, the short-term capital gains rate applies, which is the same as your ordinary tax rate: as high as 39.6 percent for some taxpayers.
Your income ultimately determines what long-term capital gains rate you pay. 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
Taxpayers in the two lowest tax brackets — 10 percent and 15 percent — could end up without any capital gains tax bill at all. That’s right: zero capital gains tax for some filers.
Before 2008, these taxpayers had to pay 5 percent of their long-term capital gains. Now any long-term assets they sell will be exempt from capital gains taxes.
|Filing status||Maximum taxable income|
|Single or married filing separately||$37,650|
|Married filing jointly||$75,300|
|Head of household||$50,400|
While lower-income individuals don’t typically invest a lot of money in taxable brokerage accounts, this tax benefit could help out retirees who have little or no taxable income.
Tax tip: The children of older individuals could combine the annual gift exclusion ($14,000 in 2016 and 2017) with this capital gains break and give appreciated long-term assets to their older parents.
15 percent capital gains tax rate for most
The 15 percent capital gains tax rate cut applies to taxpayers in the 25 percent, 28 percent, 33 percent and 35 percent tax brackets.
Find out which tax bracket you fall in.
The 15 percent tax 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.
20 percent rate for high earners
Wealthier taxpayers pay a maximum 20 percent tax on long-term capital gains. That 20 percent tax also applies to qualified dividends.
This higher rate is imposed when your adjusted gross income falls into the top 39.6 percent tax bracket.
20 percent capital gains, dividends tax rate for 2016 returns:
- Single filers with taxable income of $415,051 or more
- Head of households with taxable income of $441,001 or more
- Married joint filers with taxable income of $466,951 or more
25 percent capital gains rate
A couple of other categories of capital gains taxes come into play for some investors.
A 25 percent rate 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 on assets known as Section 1250 property.
If you’re considering a real estate investment, check out mortgage rates at Bankrate.
You’ll have to complete the worksheet in the instructions for Schedule D to figure your gain (and tax rate) for this asset, or your tax software will do the figuring for you. More details on this type of holding and its taxation are available in IRS Publication 544.
28 percent capital gains rate
Two categories of capital gains are subject to the 28 percent rate: small-business stock and collectibles.
If you realized a gain from qualified small-business stock that you held more than five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. You can get the specifics on gains on qualified small-business stock in IRS Publication 550.
If your gains came from collectibles rather than a business sale, you’ll also pay the 28 percent rate. This includes proceeds from the sale of:
- A work of art
- Precious metals
- Wine or brandy collections