‘It’s not what you make; it’s what you keep,’ is very clear when it’s time to file income taxes. Early in the fourth quarter is a good time to look at your income picture for the year and plan or make decisions that can improve your financial position. Balancing gains and losses is one way to use the tax laws in your favor. We’re accountants, not financial advisors. So we won’t make specific recommendations. What we can do is provide you with the information you need about taxes so that you have time to work with your financial advisor before feeling a need to scramble at the end of the year.
Defining capital gains and losses
A capital gain is the profit you earn on an investment such as stocks, bonds, mutual funds, or property.* It’s important to know the date that you purchased the investment and the amount that you paid. This is the basis that determines the profit when you sell. Transportation costs, if any, are also included in the basis. A capital loss is the amount you lose (instead of profit) from a sale of the same investments or property.
Short-term vs. long-term
Short-term for both gains and losses is up to one calendar year from the purchase of the investment of property. Long-term is after one year. The difference in tax rate is significant, so it’s important to know the date of purchase if you think its close. Short-term gains are taxed as ordinary income, which may be up to 39.6%. Long term gains have zero tax for the 10% and 15% tax brackets, 15% tax for the 25%, 29%, 33%, and 35% brackets, and the highest tax bracket of 39.6% ($415,050 single, $466,950 married filing jointly) pays a 20% capital gains tax.
Losses offset gains within the same definition of short-term and long-term. Short-term losses offset short-term gains, similarly for long-term losses and gains.
For the five upper tax brackets, the capital gains tax for collectibles is 28%, and depreciation recapture gains are taxed at 25%. This doesn’t apply to the 10% and 15% tax brackets. Note that if the gain puts your income above $200,000 single or $250,000 filing jointly, you may also be subject to the Net Investment Income Tax of 3.8%.
Taxes can get complicated. Please contact your Salmon Sims Thomas tax advisor with any questions.
*Note: The first $250,000 of profit on the sale of your home is not subject to capital gains tax, as long as you live in the home for two of the last five years.