This post was last updated on February 1, 2018
The American Taxpayer Relief Act of 2012 (HR 8) was signed into law on January 2, 2013. The Act defines new opportunities for retirees and investors with investment income to reduce their taxable income, but there were also important changes to capital gains tax rates that investors of all income tax brackets should be aware of.
One of the most significant benefits of the new tax law was the creation of a permanent 15% federal long-term capital gain rate (for certain taxpayers) on the sale of capital assets (held for more than one year). Examples of capital assets are stocks, bonds, mutual funds and real estate property. Let’s look at a simple example: if you purchase a stock for $10,000, hold it for at least one year and later sell it for $15,000, the resulting gain of $5,000 is taxed at 15%.
As we all know, income taxes are never simple and the new capital gain laws are no different. To elaborate, there are actually three capital gain rates, namely 0%, 15%, and 20%. Your overall income level determines which capital gain rates will apply.
2018 Federal Capital Gain Rates for Taxpayers
Updated for 2018
Single Filers
Single filers include, according to The Internal Revenue Service (IRS), are people who on the last day of the year are unmarried or are legally separated from a spouse under a divorce or separate maintenance decree, and he or she does not qualify for another filing status. Widow(er)s may be able to use the single filing status, but another filing status may prove to be more favorable. If more than one filing status applies to a taxpayer, he or she may choose the one that gives the lowest tax.1
| Taxable Income | Tax Bracket | Short-term Capital Gains Rate |
| Up to $9,525 | 10% | 10% |
| $9,526 to $38,700 | 12% | 12% |
| $38,701 to $82,500 | 22% | 22% |
| $82,501 to $157,500 | 24% | 24% |
| $157,501 to $200,000 | 32% | 32% |
| $200,000 to $500,000 | 35% | 35% |
| $500,000 and over | 37% | 37% |
| Taxable Income | Long-term Capital Gains Rate |
| Up to $38,600 | 0% |
| $38,601 to $425,800 | 15% |
| $425,801 and over | 20% |
Married, Filing Jointly
A filing status for married couples that have wed before the end of the tax year. When filing as married filing jointly, couples can record their respective incomes, deductions, and exemptions on the same tax return. Married filing jointly is best if only one spouse has a significant income.1
| Taxable Income | Tax Bracket | Short-term Capital Gains Rate |
| Up to $19,050 | 10% | 10% |
| $19,051 to $77,400 | 12% | 12% |
| $77,401 to $165,000 | 22% | 22% |
| $165,001 to $315,000 | 24% | 24% |
| $315,001 to $400,000 | 32% | 32% |
| $400,001 to $600,000 | 35% | 35% |
| $600,001 and over | 37% | 37% |
| Taxable Income | Long-term Capital Gains Rate |
| Up to $77,200 | 0% |
| $77,201 to $479,000 | 15% |
| $479,001 and over | 20% |
Taxpayers in the lowest federal brackets will not pay any tax on the sale of capital assets. That’s correct, a 0% capital gains tax. But don’t get too carried away. If your capital gains push your taxable income above $38,600 for single taxpayers or $77,200 for married taxpayers, the overage will be taxed at the 15% rate (or worse).
Taxpayers in the middle tax brackets will pay a 15% capital gain rate. However, when your adjusted gross income is over $200,000 (single) or $250,000 (married) you will pay an additional 3.8% Medicare surtax on all capital gains above those amounts (Patient Protection and Affordable Care Act). To illustrate, let’s assume you are single, have a long-term capital gain of $50,000 and your adjusted gross income is $225,000. You will pay a capital gain rate of 15% on the $50,000 gain and a 3.8% Medicare surtax on $25,000 of the gain (the amount in excess of $200,000 of adjusted gross income).
Taxpayers in the highest tax bracket will pay a 20% capital gain rate plus an additional 3.8% Medicare surtax (Patient Protection and Affordable Care Act). See the prior paragraph for a description of the 3.8% Medicare surtax.
Capital Gain Tax Rates for California Residents
If your primary residence is in California, add 9.3% for the state tax rate (this could be less for some taxpayers). For high-income taxpayers in California, that rate can be 4% higher due to the Mental Health Services Tax and recently enacted Proposition 30.
As you can see, some tax planning is in order. When your capital gains can be taxed at 0% versus 20% (plus the 3.8% Medicare surtax), you need to be mindful of your income thresholds. We do recommend that you check with your CPA or certified financial planner to successfully navigate these new capital gain rules.
Sources
1 – https://www.investopedia.com
