A look at the many capital gains 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 that 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. And 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 2013 taxes applies to

Filing statusMaximum taxable income
Single or married filing separately$36,250
Married filing jointly$72,500
Head of household$48,600

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 ($13,000 in 2012; $14,000 in 2013) 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.

20 percent capital gains, dividends tax rate

  • Single filers with adjusted gross income of $400,000 or more
  • Head of households with adjusted gross income of $425,000 or more
  • Married joint filers with adjusted gross income of $450,000 or more

The 20 percent tax rate took effect with the 2013 tax year.

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.

The 15 percent 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 percent on 2013 and future returns.

25 percent 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 percent applies to part of the gain from selling real estate you depreciated. Basically this keeps you from getting a double tax break. The Internal Revenue Service first wants to recapture some of the tax breaks you've been getting via depreciation throughout the years. You'll have to complete the work sheet 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 percent 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 five years, you generally can exclude one-half of your gain from income. The remainder is taxed at a 28 percent rate. If you've already hired a tax professional to help you sort out the 25 percent 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 percent 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.

Updated:March 27, 2014