GAMABrief: Preparing for the Capital Gains Tax Hike

257 views
192 views

Published on

Tax season is just around the corner and changes to the capital gains tax rates will affect taxpayers filing their returns at the beginning of 2014. If you sold capital assets during 2013, you might be subject to the increased rates. This brief provides important information on preparing for the capital gains tax hike.
Capital gains tax is the tax on capital asset profits—the profit made from selling an item bought for personal investment. On January 1, 2013, the government passed the American Taxpayer Relief Act of 2012 (ATRA). The ATRA added a top federal income bracket of 39.6% and increased the long-term capital gains tax rate to 20% starting in the 2013 tax year.

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
257
On SlideShare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

GAMABrief: Preparing for the Capital Gains Tax Hike

  1. 1. GAMABrief: Preparing for the Capital Gains Tax Hike Tax season is just around the corner and changes to the capital gains tax rates will affect taxpayers filing their returns at the beginning of 2014. If you sold capital assets during 2013, you might be subject to the increased rates. This brief provides important information on preparing for the capital gains tax hike. Capital gains tax is the tax on capital asset profits—the profit made from selling an item bought for personal investment. On January 1, 2013, the government passed the American Taxpayer Relief Act of 2012 (ATRA). The ATRA added a top federal income bracket of 39.6% and increased the long-term capital gains tax rate to 20% starting in the 2013 tax year. Short-­‐  and  Long-­‐Term  Capital  Gains There are two types of capital gains: short-term and long-term. Short-term capital gains are profits made from selling capital assets owned for less than a year. Long-term capital gains are profits made from selling capital assets owned for more than one year. The tax rates for short-term and long-term capital gains are different. Short-term capital gains are lumped together with regular income and are taxed according to an income earner’s tax bracket. Conversely, long-term capital gains are taxed at a lower set rate based on the earner’s tax bracket. Historical  Trends  of  the  Capital  Gains  Tax  Rate   The government uses the capital gains tax as a mechanism to generate funds. Given the current and growing national debt, it is no surprise that the capital gains tax increased as the government searches for ways to make more revenue. Historically, the capital gains rate has been much higher than it is now. From 1917 to 1921, the capital gains tax rate reached highs of more than 70%. During the 1930s, the rate often neared 40%. And, in the post World War II era, the capital gains rate has been, on average, about 25.5%. While not necessarily comforting for those subject to the increased rate, high capital gains rates in the past may put the current rate into perspective. Key  Changes  for  the  2014  Tax  Filing  Season For most taxpayers, the short- and long-term capital gains tax rate will remain the same. For short-term capital gains, the federal income tax rates remain at 10%, 15%, 25%, 28%, 33% and 35%. For long-term capital gains, individuals in the 10% and 15% income tax brackets continue to have a 0% capital gains tax rate and 15% for those in the 25%, 28%, 33% and 35% tax brackets. The ATRA will affect the short- and long-term capital gains tax rates for upper income earners—singles with taxable annual income above $400,000, married joint-filers with taxable annual income above $450,000 and heads of household with a taxable income above $425,000. For short-term capital gains (and non-qualified dividends), a top federal income tax bracket was added, making the maximum rate 39.6% rather than 35% for upper income earners. For long-term capital gains (and qualified dividends), the maximum cap on the tax rate increased from 15% to 20% for upper income earners. A  GAMA  White  Paper  produced  by  Nicole  Nord                                                                                                          ©  2013.  Gagnier  Margossian  LLP.    All  rights  reserved.  
  2. 2.  Tax Bracket Taxable Income - Joint (Single)* $0 - $17,850 ($0 - $8,925) $17,851 - $72,500 ($8,926 - $36,250) $72,500 - $146,400 ($36,251 - $87,850) $146,401 - $223,050 ($87,851 - $183,250) $223,051 - $398,350 ($183,251 - $398,350) $398,351 - $450,000 ($398,351 - $400,000) $450,001 - above ($400,001 - above) Long Term Capital Gains Rate 2012 2013 0% 0% 15% 15% 15% 15% 15% 10% 15% 25% 28% 33% 35% 39.60% 0% 0% 15% 15% 15% 15% 20% *Based on 2013 inflation rates. Obamacare Medicare kicks into effect for the 2013 tax year, meaning there is now a 3.8% Medicare tax on investment income (an income that includes capital gains and dividends). The tax is imposed on those with a modified adjusted gross income (MAGI) greater than $200,000 for singles and heads of household and $250,000 for married joint-filers. Including the Medicare tax, upper income earners have a top long-term capital gains (and qualified dividends) tax rate of 23.8% and top short-term capital gains (and non-qualified dividends) tax rate of 43.4%. Upper Income Earners Top Tax Rate 2012 2013 Long-term capital gains 15%23.8%* Taxable income 35% 39.6% Short term capital gains 35%43.4%* *Includes 3.8% Medicare Surtax Being  Prepared  for  the  Tax  Season  and  Looking  Ahead  to  2015 As you prepare for the 2014 tax filing season and think ahead to 2015, there are several important points to keep in mind. First, the capital gains tax rate changes and 3.8% Medicare tax along with reductions in personal and itemized deductions will cut significantly into the income of upper income earners and those with an MAGI higher than $200,000 for singles and heads of household and $250,000 for married joint-filers. Second, while the ATRA makes the rates “permanent,” this does not mean that the rates will remain the same in the coming years. In fact, the capital gains tax rate will likely increase rather than decrease in the near future. Some predict that the long-term capital gains and qualified dividends will eventually be taxed like short-term capital gains—as ordinary income, with a possible cap at 28%. Finally, the IRS recently announced the annual inflation adjustments for several provisions for the 2014 tax year, to be filed in 2015. Notably, thresholds for upper income earners will be $406,750 for singles, $457,600 for married joint-filers and $432,200 for heads of household, up from $400,000, $450,000 and $425,000 respectively. Considering  tax-­‐efficient  strategies  and  strategizing  your  investment  and  income  decisions  will  be  criMcal  as  you  plan  for   the  upcoming  tax  season.  If  you  have  quesMons,  contact  an  aRorney  at  Gagnier  Margossian  LLP  to  explore  your  opMons. Internet Intellectual Property Privacy Social Media Technology The Good Stuff #nerdlawyers Los Angeles Sacramento T: 415.766.4591 F: 909.972.1639 E: consult@gamallp.com gamallp.com @gamallp San Francisco

×