Tax on Capital Gains: Knowing Your RateSubmitted by Bernhardt Wealth Management on January 27th, 2020
Most of us know that the income we derive from long-term capital gains—profits on the sale of an investment or other asset that we have held for at least a year—is taxed at a different rate than our ordinary income. According to the 2020 tax tables, individuals with adjusted gross income (AGI) of $40,000 or less ($80,000 for those married filing jointly) will pay at a 0% rate on capital gains. Above that level, the long-term capital gains rate is 15% until single taxpayers reach $441,451 in AGI ($496,601 for couples). For many of those taxpayers, that 15% rate is a better deal than the 22%, 24%, 32%, or 35% rates that they are paying on their ordinary income. In fact, even if their income is higher than $441,451 (single) or $496,601 (couple), they would still only pay a 20% tax on long-term capital gains income, compared with the 35%–37% rate they would pay on their ordinary income.
So far, so good. But as certain types of income increase, there are other capital gains provisions to consider. For example, persons with modified AGI (which includes municipal bond income and other adjustments) over $200,000 ($250,000 for couples) are subject to the net investment income tax (NIIT), which adds another 3.8% to the tax on your total investment income—the sum of short- and long-term capital gains, dividends, interest, and rental or royalty income. In other words, these taxpayers, who would otherwise pay only 15% on their long-term capital gains, would instead have to pay 18.8%. Those who would otherwise be in the 20% capital gains tax bracket would instead pay 23.8%.
And that’s not all. If you have long-term capital gains on collectibles such as artwork, coins, and stamps or precious metals, bullion, or precious metal ETFs, the maximum federal tax rate is 28%.
Short-term capital gains (gains on assets held less than a year) are taxed at the same rate as ordinary income, which could be anywhere from 10% to 37%.
The different levels of taxation applied to the gains from different types of investments and assets can be confusing. Especially at this time of year, when many of us are gathering our records in preparation for filing our tax returns, it’s important to know where you stand and what you can do to minimize the tax burden on your portfolio. A certified, fiduciary financial adviser can help you sort through the implications of various types of income and the capital gains implications of each. Remember: money you pay in taxes isn’t available to work for you. We should all pay our fair share, but there’s no need to pay more than you should. If we can help you find answers for tax questions related to your investments, please get in touch.