In the letter
- Long-term capital gains are net gains from investments held for more than a year. There are three tax rates – 0%, 15% and 20% – that apply to different taxable income levels depending on the registration status.
- Short term capital gains are net gains on investments held for a year or less. They are taxed at the same rates as ordinary income.
- There is an additional surcharge for single applicants with an Adjusted Gross Income (AGI) greater than $ 200,000 and most couples filing together to an AGI over $ 250,000.
- Some investors do not owe taxes on their capital gains and dividends.
For investors using taxable accounts – as opposed to tax-protected retirement accounts like IRAs or 401 (k) s – there are special rules in tax law that offer advantages and pitfalls. Congress has not changed these rules recently.
Capital gains and losses
When an investor sells a stake in a taxable account, the capital gain or loss is the difference between the original cost (plus adjustments) and the selling price. So if someone bought a share for $ 3 and sold it for $ 5, the capital gain is $ 2. If the investor bought another share for $ 3 and sold it for $ 2, the capital loss is $ 1.
A key benefit is that capital losses can offset taxable capital gains. If the above investor had sold both shares in the same year, she would have net taxable income of $ 1 instead of $ 2 for that year. If total losses exceed total profits, the additional losses can offset up to $ 3,000 in income such as wages for that year. Unused capital losses are carried forward to future years to offset profits.
Long-term capital gains are net gains from investments held for more than a year. Short-term capital gains from investments held for a year or less are taxed at the same rates as ordinary income, an important difference that day traders should be aware of.
Dividend tax rates and 3.8% additional tax
The favorable tax rates on dividends apply to those who are “qualified,” which most are. Unqualified dividends are taxed at ordinary income rates.
Most single applicants whose Adjusted Gross Income (AGI) exceeds $ 200,000 and most couples co-filing with AGI more than $ 250,000 will be subject to a net tax of 3.8%. This surcharge applies only to the amount of investment income above these thresholds.
For example, if a single applicant has ordinary income of $ 150,000 plus taxable long-term profit of $ 50,000 plus qualifying dividends of $ 25,000, then $ 25,000 is subject to 3.8% surcharge.
As a result, top taxpayers typically owe 23.8% instead of 20% of their long-term profits and dividends. Some investors in the 15% class for this income owe all or part of the 3.8% surcharge tax as their gross adjusted income is above the $ 250,000 / $ 200,000 thresholds.
For example, let’s say David is a single filer with an adjusted gross income of $ 210,000, and that $ 50,000 of that is a godsend of long-term return on an investment and some qualifying dividends. In that case, David’s investment income would likely be taxed at a tax rate of 15%, but he would owe an additional 3.8% on $ 10,000 since that’s the amount of investment income over $ 200,000 from AGI. Thus, his tax rate on the $ 10,000 would be 18.8%.
Major inflation-adjusted tax numbers for capital gains and dividends, 2020
Up to $ 40,000
$ 40,001- $ 441,450
$ 441,451 +
Up to $ 80,000
$ 80,001- $ 496,600
$ 496,601 +
Major inflation-adjusted tax numbers for capital gains and dividends, 2020
Up to $ 40,000
$ 40,001- $ 441,450
$ 441,451 +
Up to $ 80,000
$ 80,001- $ 496,600
$ 496,601 +
Major inflation-adjusted tax numbers for capital gains and dividends, 2020
Up to $ 40,000
$ 40,001- $ 441,450
$ 441,451 +
Up to $ 80,000
$ 80,001- $ 496,600
$ 496,601 +
Important tax numbers adjusted for inflation
for capital gains and dividends, 2020
Up to $ 40,000
$ 40,001- $ 441,450
$ 441,451 +
Up to $ 80,000
$ 80,001- $ 496,600
$ 496,601 +
Major inflation-adjusted tax numbers for capital gains and dividends, 2021
Up to $ 40,400
$ 40,401- $ 445,850
$ 445,851 +
Up to $ 80,800
$ 80,801- $ 501,600
$ 501,601 +
Major inflation-adjusted tax numbers for capital gains and dividends, 2021
Up to $ 40,400
$ 40,401- $ 445,850
$ 445,851 +
Up to $ 80,800
$ 80,801- $ 501,600
$ 501,601 +
Major inflation-adjusted tax numbers for capital gains and dividends, 2021
Up to $ 40,400
$ 40,401- $ 445,850
$ 445,851 +
Up to $ 80,800
$ 80,801- $ 501,600
$ 501,601 +
Important tax numbers adjusted for inflation
for capital gains and dividends, 2021
Up to $ 40,400
$ 40,401- $ 445,850
$ 445,851 +
Up to $ 80,800
$ 80,801- $ 501,600
$ 501,601 +
How the zero rate applies to investment income
Some people do not owe taxes on their capital gains and dividends after a sale. Here is a simplified example. For example, suppose Janet is a single taxpayer with a taxable ordinary income of $ 30,000 for 2020 after deductions and exemptions, e.g. B. for tax-free interest on municipal bonds or the sale of their home. Your taxable income is subject to regular rates of up to 12% as stated in the income tax brackets.
But Janet also has long-term capital gain of $ 20,000 that is “stacked” on top of her taxable income of $ 30,000 for a total taxable income of $ 50,000. For 2020, the 15% capital gains class begins on taxable income of $ 40,000 for single applicants. As a result, Janet would owe no tax on $ 10,000 of her profits and 15% on the remaining $ 10,000.
This year’s tax period for private individuals ends on May 17th. Would you like to know more before filing your taxes? Register for free to download your free copy of the WSJ Tax Guide 2021.
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