Here’s a reminder for investors, collectors, homeowners, and others selling capital assets – you might owe capital gains tax on any profit from the sale. But pinning down the exact amount of tax due on your gain can be a challenge. One reason for the difficulty is that capital gains tax rates differ depending on your taxable income, how long you held the property, and the type of property you sold.
So don’t run out and immediately spend all your earnings if you’re lucky enough to score big on a hot stock tip. Instead, put some of the profit aside for taxes. And to get a sense of how much you ought to stash away for tax time (or for an estimated tax payment), check out the different capital gains tax rates below. Plus, as an additional warning, some people have to pay an extra surtax on top of the capital gains tax. So don’t forget to take that into consideration, too.
LONG-TERM CAPITAL GAINS TAX RATES
Gains from the sale of stocks, mutual funds, and most other capital assets that you held for more than one year, which are considered long-term capital gains, are taxed at either a 0%, 15% or 20% rate.
However, which one of those long-term capital gains rates – 0%, 15% or 20% – applies to you depends on your taxable income. The higher your income, the higher the rate. Here are the long-term capital gains taxable income thresholds for the 2022 tax year:
2022 LONG-TERM CAPITAL GAINS TAX RATE THRESHOLDS
|
Capital Gains |
Taxable Income |
Taxable Income |
Taxable Income |
Taxable Income |
|---|---|---|---|---|
|
0% |
Up to $41,675 |
Up to $41,675 |
Up to $55,800 |
Up to $83,350 |
|
15% |
$41,675 to $459,750 |
$41,675 to $258,600 |
$55,800 to $488,500 |
$83,350 to $517,200 |
|
20% |
Over $459,750 |
Over $258,600 |
Over $488,500 |
Over $517,200 |
The income thresholds for the long-term capital gains tax rates are adjusted each year for inflation. To see how the thresholds changed from 2021 to 2022, here are the figures for the 2021 tax year:
2021 LONG-TERM CAPITAL GAINS TAX RATE INCOME THRESHOLDS
|
Capital Gains |
Taxable Income |
Taxable Income |
Taxable Income |
Taxable Income |
|---|---|---|---|---|
|
0% |
Up to $40,400 |
Up to $40,400 |
Up to $54,100 |
Up to $80,800 |
|
15% |
$40,401 to $445,850 |
$40,401 to $250,800 |
$54,101 to $473,750 |
$80,801 to $501,600 |
|
20% |
Over $445,850 |
Over $250,800 |
Over $473,750 |
Over $501,600 |
SHORT-TERM CAPITAL GAINS TAX RATES
The tax rate on short-term capitals gains (i.e., from the sale of assets held for one year or less) is the same as the rate you pay on wages and other “ordinary” income. Those rates currently range from 10% to 37%, depending on your taxable income. For your ordinary tax rate, see What Are the Income Tax Brackets for 2022 vs. 2021?
Generally, the rate you’ll pay for long-term capital gains is less than the rate you’ll pay for short-term gains. So, in most cases, you can save on taxes by hold capital assets like stocks, bonds, and real property for more than one year before selling.
CAPITAL GAINS TAX RATE FOR COLLECTIBLES
There are a few exceptions to the general capital gains tax rates. Perhaps the most common exception involves gains from the sale of collectibles that qualify as capital assets. For this special rule, a “collectible” can be a work of art, antique, stamp, coin, bottle of wine or other alcoholic beverage, gold or other precious metal, gem, historic object, or another similar item. If you sell an interest in a partnership, S corporation, or trust, any gain from that sale attributable to the unrealized appreciation in the value of collectibles is also treated as gain from the sale of collectibles.
Instead of a 20% maximum tax rate, long-term gains from the sale of collectibles can be hit with a capital gains tax as high as 28%. If your ordinary tax rate is lower than 28%, then that rate will apply. But if you’re in a higher tax bracket (i.e., 32%, 35% or 37%), then the capital gains tax on your collectible gains is capped at 28%.
The 28% limit doesn’t apply to short-term capital gains. So, if you don’t own a collectible for at least one year before selling it, you’ll still be taxed on any gain at your ordinary tax rate (between 10% and 37%).
CAPITAL GAINS TAX RATE FOR QUALIFIED SMALL BUSINESS STOCK
If you sell “qualified small business stock” (QSBS) that you held for at least five years, some or all of your gain may be tax-free. However, for any gain that is not exempt from tax, a maximum capital gains tax rate of 28% applies.
As with the 28% rate for collectibles, if your ordinary tax rate is below 28%, then that rate will apply to taxable QSBS gain. The 28% rate doesn’t apply to short-term capital gains from the sale of QSBS, either.
CAPITAL GAINS TAX RATE FOR PREVIOUSLY DEDUCTED DEPRECIATION
If you sell real estate for which you previously claimed a depreciation deduction, you may have to pay a capital gains tax of up to 25% on any unrecaptured depreciation. The taxable amount is known as “unrecaptured Section 1250 gain” (named after the tax code section covering gain from the sale or other disposition of certain depreciable real property). The rest of your long-term gain is taxed at either the 0%, 15% or 20% rate. For most people, this only comes up if you sell rental property.
Once again, the 25% rate is a maximum rate. So, if your ordinary income tax rate is lower, you won’t have to pay that much. Instead, your ordinary tax rate will apply. Also, the rate doesn’t apply to short-term gains.
SURTAX ON NET INVESTMENT INCOME
There’s an additional 3.8% surtax on net investment income (NII) that you might have to pay on top of the capital gains tax. (NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities, and royalties.) You must pay the surtax if you’re a single or head-of-household taxpayer with modified adjusted gross income (AGI) over $200,000, a married couple filing a joint return with modified AGI over $250,000, or a married person filing a separate return with modified AGI over $125,000. Use Form 8960 to calculate the surtax.
See the article here.
By Rocky Mengle
Published July 18, 2022