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Understanding Capital Gains

Are you considering bailing out of stocks because you are worried that the capital gains tax structure might change? Before you hit the sell button, think it over carefully and ensure you understand the tax implications – especially the differences between short- and long-term capital gains.

Capital gains taxes are separated into two categories: short-term and long-term. And as you might surmise, the category that applies to you depends on how long you've held the assets.

  • Short-term capital gains taxes are applied to profits from selling an asset you've held for less than a year. Short-term capital gains taxes are aligned with where your income places you in federal tax brackets – in other words, and you pay the same rate as you would on ordinary income taxes.

  • Long-term capital gains taxes are applied to assets held for over a year. The long-term capital gains tax rates are 0%, 15%, and 20%, depending on your income. Generally speaking, these rates are lower than ordinary income tax rates.

Long-Term Capital Gains Tax Rates

The tax rate on most net capital gain is no higher than 15% for most individuals, but if you are a high-earner, you might fall into the 20% long-term cap gain bracket.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

  1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.

  2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.

  3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Although Congress continues to pass large economic bills (the CARES Act and the Inflation Reduction Act were each about 800 pages long), no single bill can account for every unique situation. Worse, the federal tax code is crazily long. At over 2,500 pages, it is 5x the length of the Grapes of Wrath, written by John Steinbeck.

So, before you go down a path that might not be in your best interest long-term. Contact our office today and schedule an appointment to determine how any new and proposed tax changes might impact you and your family.

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Source: 2023 FMeX





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