Gerald Dewes
Capital gains tax is the tax on profits realized from the sale of capital assets such as stocks, bonds, jewelry, coin collections and real estate property. A person is subject to capital gains tax only when capital gain is realized (when an asset is sold), it doesn’t apply to unrealized capital gains or unsold investments, so stocks whose value is increasing over the years are not subject to capital gains tax provided remain unsold.
However, in case of mutual fund investments, investors could be subject to capital gains tax when a mutual fund sells shares of its holdings during the year. Although, the exception is that a fund’s capital gains distribution is not taxable provided the fund is held in tax-deferred account.
Capital gains are of two types: long term and short term capital gains; each of them subject to different tax rates. Long-term gains are on assets held for more than 12 months before selling. The American Taxpayer Relief Act of 2012 instituted long-term capital gains tax rates of 0%, 15% and 20%, depending in which tax bracket your income falls. Short-term gains (on assets held for 12 months or less) are taxed as ordinary income at seller’s marginal income tax rate.
The Tax Cuts and Jobs Act, passed into law in December 2017 established “breakpoints” for application of these rates as under current law, except the breakpoints will be adjusted for inflation.
Tax Rates for Long-term Capital Gains for the year 2020
0% breakpoint will be:
up to $80,000 (up from $78,750 in 2019) for married taxpayers filing jointly;
up to $53,600 (up from $52,750 in 2019) for head of household; and
Up to $40,000 (up from $39,375 in 2019) for all other filers (except estates or trusts).
The 15% breakpoint will be:
$496,600 (up from $488,850 in 2019) for married taxpayers filing jointly;
$469,050 (up from $461,700) for head of household filers; and
$441,450 (up from $434,550 in 2019) for all other filers (except estates or trusts).
The 20% breakpoint will be:
$496,600 (up from $488,850 in 2019) for married taxpayers filing jointly;
$469.050 (up from $461,700 in 2019) for head of household filers; and
$441,450 (up from $434,550 in 2019) for all other filers (except estates or trusts).
The taxable amount of each gain is generally determined on “cost basis” — in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. (Different rules apply to determine your starting basis If you received the property as a gift or inheritance.)
Any capital losses incurred in the current or previous tax years can be used to offset taxes on current-year capital gains. A capital loss incurs when your investment is sold for an amount less than its purchase price. Total of long-term capital gains for the year less any capital losses incurred is the “net capital gain”. Losses of up to $3,000 a year may be claimed as a tax deduction for married joint filers and $1,500 for married separately filers.
If you have been purchasing shares in a mutual fund over several years and want to sell some of them, instruct your financial consultant to sell shares you purchased for the highest amount of money, this will reduce your capital gains. Also ensure to specify which shares you are selling in order to take advantage of the lower rate on long-term gains so the IRS knows which shares you’re selling had a holding period of more than a year and doesn’t assume that you are selling shares you have held for a shorter time and tax you using short-term rates. Investors near retirement should plan strategically about selling their profitable assets in a way that they’re not raising their taxes as a result.
Higher-income taxpayers may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes capital gains) if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers). This additional tax is imposed as an outcome of the Patient Protection and Affordable Care Act.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ¬purpose of ¬avoiding any ¬federal tax penalties. You are encouraged to seek advice from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ¬purchase or sale of any security.
IMPORTANT DISCLOSURES
Gerald R. Dewes does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Visit: https://artvoice.com/author/gerrydewes/