New legislation has been proposed that would significantly increase the long-term capital gains tax rate. As a result, it's important for taxpayers to understand what capital gains tax is and how a change might affect their tax liability.
This article can help you understand the capital gains tax as it is now and how it might change.
Complete information about capital gains tax changes for 2024 can be found from the IRShere.
What is Capital Gains Tax?
Capital gains taxis the tax charged on profits made from the sale of a capital asset, such as a house, stocks or other investments. The tax is owed for the year that the profits from a sale were earned. The rate of capital gains tax depends on the investor's income and how long they held the asset.
For example, if you purchased a stock for $300 and sold it later for $400, you'd have a capital gain of $100 for that sale. How much you get taxed on your gains depends on multiple factors.
2024 Capital Gains Tax Rates
The first factor that determines your capital gains tax rate is how long you've held an asset. Generally speaking, capital gains taxes are categorized in two ways: short- and long-term rates.
Long-Term Capital Gains Tax Rates
Long-term capital gains taxes occur when an asset has been sold after being owned for over a year. These taxes can have rates of 0%, 15% or 20% depending on income and filing status.
| Filing Status | 0% | 15% | 20% |
| Single | $0 to $47,025 | $47,026 to $518,900 | $518,901 or more |
| Married filing jointly | $0 to $94,050 | $94,051 to $583,750 | $583,751 or more |
| Married filing separately | $0 to $47,025 | $47,026 to $291,850 | $291,851 or more |
| Head of household | $0 to $63,000 | $63,001 to $551,350 | $551,351 or more |
Short-Term Capital Gains Tax Rates
Short-term capital gains taxes occur on profits for assets sold after being held for a year or less. Short-term capital gains tax rates can range from 10% to 37%, and are based on your tax bracket.
To learn about what tax bracket you fall under, visit our article about2024 tax brackets here.
How to Calculate Capital Gains
When you sell property, stocks or other assets, you can calculate your capital gains simply by subtracting the amount you paid for the asset from the selling price. For example, if you purchased shares in a mutual fund for $1,000 and you sold them four years later for $3,000, your capital gain is $2,000.
Because short-term and long-term capital gains are taxed differently, make sure to categorize your assets and calculate them separately within these parameters. For example, if you sold those mutual fund shares after just six months of your purchase, you would pay short-term capital gains tax, which is the same as your regular income tax rate. However, if you waited more than one year to sell the shares, they will be taxed at long-term capital gains tax rates.
Understanding the Impact of the Capital Gains Tax
Investors pay capital gains taxes on the sale and qualified dividends of stocks, bonds, real estate and collectible assets. And high-income investors don't just pay the base capital gains tax rate. The IRS charges high-income investors an additional 3.8% net investment income tax.
How to Mitigate Tax Liability on Capital Gains
For investors, capital gains taxes can be significant—especially because proposed legislation could increase the capital gains tax rate for those with higher gains.
If the American Families Plan becomes law, many investors with income over $1 million could pay 43.4% in federal capital gains taxes. The same rate will apply to individual taxpayers or those married filing separately with income over $500,000.
The total capital gains tax rate can also depend on the state in which the taxpayer lives, as some states impose additional capital gains taxes at the state level.
But there are options for managing the tax impact, such as the following considerations.
Keep Your Income Below $1 Million
Should the capital gains tax rate increase pass, if you think your taxable income will be $1 million or more in a year when the higher rate is in effect, there are ways to reduce it, such as increasing itemized deductions.
You can consider options such as increasingcharitable donations, pre-paying mortgage payments with tax-deductible interest, deducting business expenses or paying off medical and dental bills.
Time Investment Sales
If the implementation date of the tax increase is not made retroactive, an investor who would be subject to the higher rate can choose to sell investments prior to the effective date and lock in the lower capital gains rate.
Offset Capital Gains With Capital Losses
Rebalancing your portfolio at the end of each year is a common strategy for minimizing capital gains. By selling off low-performing assets, you can help offset capital gains with capital losses.
Leverage Tax-Advantaged Retirement Plans
Work to maximize tax-advantaged contributions to health savings accounts, 529 education savings plans, and retirement accounts. Most retirement plans do not require tax to be paid until gains are withdrawn. At that point, the gains are typically taxed at your regular income tax rate and not as capital gains.
Plan Carefully for Business Sales
The sale of a business can result in a capital gain worth millions of dollars. Business owners who may not normally fall into the category of income over $1 million might suddenly have to pay more than 40% of their earnings from a business sale in federal capital gains taxes.
However, there are options for structuring the sale of a business to lower tax liability, such as an installment sale, in which you take a portion of the payout annually for several years. If your business is in transition, it's a good idea to meet with a financial or tax advisor at least six to nine months ahead of the sale. He or she can help you determine the best way to structure the sale of your business to minimize capital gains tax liability.
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