Someone asked the other day, “What is the tax rate on capital gains?” Like most tax questions, the answer can be a little complicated. It depends on several things.
If the capital gain is for a stock or most other capital assets owned less than one year, the answer depends on your other income. If you have relatively low taxable income (a little less than $37,950 after claiming the standard deduction or itemized deductions and the personal exemption(s) for a single person) the answer is probably not more than 15 percent. Short term gains are taxed like wages.
If the gain is for the item held more than one year and otherwise qualifies as long term capital gain and a single person’s taxable income is less than $37,950 ($75,900 for a couple), the answer could be “zero.”
If your taxable income is fairly high (more than $418,400 for a single person or more than $470,700 for a married couple) the long term capital gain tax rate appears to be 20 percent. However, if most of the income is earned income (wages, profits from business) then the Extra Medicare Tax of 3.8 percent would be an additional item, making the rate even more. With the “phaseout” of itemized deductions and personal exemptions the rate is even higher. For a single person the “phaseout” or disallowance begins at Adjusted Gross Income (AGI) of $261,500 and for a married couple it begins at AGI of $313,800.
If the item sold is rental real estate the rules on depreciation recapture may apply. If so, the tax rate on Unrecaptured section 1250 property can be 25 percent. There are several special rules to consider for this item.
If the item sold is a collectible such as precious metals, then the basic rate is probably 28 percent.
If you inherited the item, your tax basis (cost) is probably the value of the item at date of death so you may not even have a gain for income tax purposes. If you inherit a house that has a fair market value at the date of death of $300,000 and you sell it (after selling expenses) for $290,000, you would have a capital loss. Inherited items that have a basis of value at death are long term capital assets-except not IRAs, retirement accounts, annuities and a few other items.
If you received the item as a gift, your tax basis is limited-probably the tax basis of the person that gave the item to you.
Like many tax answers, it depends on the details which capital gain tax rate might apply.
Did you hear? “Defining tax law ... a composite of constitutional doctrine and changing statutory provisions each having it history,” by Judge Jerome Frank (1889-1957).
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.