Calculating exactly how your capital gains are taxed is not always so simple. There are many complicated rules and stipulations to keep in mind, and it can get confusing very quickly. We've broken down the taxation of your capital here.
Long-Term vs. Short-Term Assets
An asset is considered long term if it is held for more than a year, and it is considered short term if it is held for less than a year. This simply means that the clock starts ticking any time you purchase an asset and stops when you sell it. A short-term asset is taxed at the same rate as your income. It receives no special treatment as far as taxes are considered. Long-term assets are in fact eligible for special rates, which make them a little more complicated. We've explained the breakdown of long-term assets below.
Long-term Capital Gains
Contrary to popular belief, the tax rate on your long-term capital gain is not always 15%. The amount you will be taxed depends on many factors, including what tax bracket you fall into and what type of asset you are selling. Taxes on capital gains also fluctuate based on presidential administration and by state. For more information on how capital gains taxes vary by state, reference our State Capital Gains Map .
10% to 15% Tax Bracket: If you fall in the 10% to 15% tax bracket, your capital gains rate is 0%. More taxpayers than you might think fall into this bracket. For the 2016 tax year, if your taxable income is less than $37,650 for a single filer, $50,400 for a head of household filer, or $75,300 for a married couple filing a joint return, then this applies to you.
25% to 35% Tax Bracket: If you fall in the 25% to 35% tax bracket, your capital gains rate is 15%. Most taxpayers fall into this tax bracket. You fall into this tax bracket if, for the 2016 tax year, your taxable income is between $37,650 and $415,050 for a single filer, between $50,400 and $441,000 for a head of household filer, or between $75,300 and $466,950 for a married couple filing a joint return.
39.6% Tax Bracket: If you fall in the 39.6% tax bracket, your capital gains rate is 20%. For the 2016 tax year, if your taxable income is more than $415,050 for a single filer, more than $441,000 for a head of household filer, or more than $466,950 for a married couple filing a joint return, then you fall into this bracket.
Investment Real Estate
Simply stated, your capital gain on a real estate investment property is equal to the sales price minus its adjusted basis . Here, the same tax rates still apply for each tax bracket. For instance, the 10% to 15% tax bracket pays 0% on capital gains, the 25% to 35% bracket pays 15%, and the highest tax bracket pays 20%. For more on real estate specifics, reference our guidebook and blog.
The 3.8% Medicare Surtax
The Health Care and Education Reconciliation Act of 2010 put into effect a 3.8% surtax on certain income in 2013. For individuals, the tax takes into account two factors: your net investment income (NII) and your modified adjusted gross income (MAGI). The MAGI above a certain threshold is compared to the NII, and the tax is applied to whichever value is the lesser of the two. Below are the MAGI thresholds:
- $250,000 for married couples filing together
- $125,000 for married couples filing separately
- $200,000 for all other taxpayers
For trusts and estates, the Medicare surtax is similar yet slightly different. The tax is still dependent on two factors: the trust or estate's undistributed net invested income (UNII) and its adjusted gross income (AGI). Just as with the individual surtax, the AGI above a certain threshold is compared with the UNII, and the lesser of the two is taxed. However, contrary to the individual surtax, the threshold for a trust or estate's AGI is adjusted every year for the dollar amount that starts the highest tax bracket.
Capital losses are used to offset capital gains on your tax return. For instance, short-term capital losses are subtracted from short-term capital gains and long-term capital losses are subtracted from long-term capital gains. Although capital losses may cast a cloud over anyone's personal finances, there is a silver lining as far as taxes are concerned. Any capital loss in excess of a capital gain is tax deductible up to a certain limit. This limit is dependent on how you file your taxes (married couples together, separately or single filer).